College Tax Benefits for Arkansas Residents

Overview and Rules for Deducting Tuition Costs in Arkansas

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The state of Arkansas allows residents who contribute money to the Arkansas Tax Deferred Tuition Savings Program, a Section 529 plan also known as GIFT, to take a tax deduction for contributions of up to $5,000 per taxpayer per year. In other words, a parent of one child could receive a maximum deduction of $5,000. A married husband and wife could receive a maximum deduction of $10,000 at tax time.

And here's another tax perk: Qualified withdrawals from other states’ Section 529 plans don't have to be included as income on an Arkansas resident's state income tax returns.

What's a 529 Plan?

These plans are sponsored by states, and all 50 states have at least one version. They're considered tax-advantaged accounts because you're not taxed at the federal level on the growth of the money you contribute to the plan, and most states don't tax the growth either. Of course, there's one small catch. The funds must be used for qualified educational purposes when you make withdrawals.

Otherwise, you'll not only pay income tax on the growth, but you might be subject to a 10-percent tax penalty as well, although the penalty is typically only on the growth portion of the account, not on your initial investment.

There's No Deduction for Tuition

Unfortunately, there is no deduction for actually paying college tuition as opposed to contributing to the Arkansas Section 529 plan, at least not without a bit of creativity. Technically, you could make a deductible contribution to the Arkansas Section 529 plan for your college student, then have it distributed to the school the very next day. This would effectively allow you to take the deduction.

The Value of the Arkansas Section 529 Tax Deduction

If you're an Arkansas resident trying to decide whether it's a good idea to use the Arkansas Section 529 plan provisions, remember to account for the potential tax savings of contributions to the GIFT plan.

Contributions to other states’ plans don't earn you a deduction, even though you're not taxed on the withdrawals either.

Considering that the top income tax bracket in Arkansas is 6.9 percent, a $10,000 contribution to a state plan can save you up to $690 at tax time. The deduction is a 6.9 percent bonus right off the bat.

Claiming the Deduction

The deduction is actually considered an “adjustment to income.” You don't have to itemize to take advantage of it. You can claim it on Line 22 of the state income tax form for full-year residents, but you must first complete Form AR1000ADJ, the Schedule of Adjustments, and attach it to your tax return.

Not a Tax Deduction, But an Awesome Benefit

The state of Arkansas has initiated a "matching program" for some residents as well. It's called the Aspiring Scholars Program, and it's for contributions made to the Arkansas Section 529 plan. The state will match from 100 percent to 200 percent of your annual contribution, up to $500 per year, if your household income is less than $60,000.