How to Get the Arkansas 529 Tax Deduction

A 529 plan is a savings account designed to help families pay for future education costs. These plans offer federal tax advantages, such as tax-deferred growth and tax-free withdrawals for qualified expenses. Many states also provide their own tax benefits, and Arkansas offers a state income tax deduction for individuals who contribute to a 529 plan.

Eligibility and Deduction Limits

Any Arkansas taxpayer who contributes to a 529 plan can be eligible for a state tax deduction, regardless of whether they are the account owner or the beneficiary. This means grandparents, family members, or friends who contribute to a child’s 529 account can claim the deduction on their own Arkansas tax return. The deduction is not limited by income, making it accessible to all taxpayers in the state.

The amount that can be deducted depends on whether you contribute to Arkansas’s state-sponsored plan or an out-of-state plan. For contributions to the Arkansas Brighter Future 529 Plan, an individual or a married person filing separately can deduct up to $5,000 annually. Married couples filing a joint return can deduct up to $10,000 per year.

While Arkansas allows taxpayers to deduct contributions to any qualified 529 plan nationwide, the limits are lower for out-of-state plans. For these plans, the deduction is limited to $3,000 for an individual and $6,000 for a married couple filing jointly. These limits apply to the total amount contributed, not per beneficiary or per account.

For those who contribute more than the annual maximum, Arkansas law includes a carryforward provision. If a taxpayer’s contributions in a single year exceed their annual deduction limit, the excess amount is not lost. Instead, it can be carried forward and deducted on state tax returns for up to the next four succeeding tax years until the full contribution has been deducted.

Making a Qualifying Contribution

To secure the tax deduction for a specific tax year, the contribution must be completed by the end of the calendar year. The deadline for making a qualifying contribution is December 31. Any contributions made after this date must be claimed on the following year’s tax return.

If you do not already have a 529 account, you will need to open one first, which can be done online through the chosen plan’s website. You will need to provide basic information for the account owner and the designated beneficiary, such as their name, address, and Social Security number.

Once an account is established, funds can be added through several methods. Common options include one-time or recurring electronic bank transfers, mailing a check, or setting up payroll direct deposits. Initiate the contribution with enough time for the funds to be received and processed by the plan administrator before the December 31 cutoff.

How to Claim the Deduction on Your Tax Return

To claim the deduction, you must report it as a subtraction from your total income on your Arkansas state income tax return. This lowers your overall state tax liability and is done when you prepare and file your annual state taxes.

The deduction is reported on the Arkansas Individual Income Tax Return, Form AR1000F. You will report the amount of your contribution on the line designated for “Tax Deferred Tuition Savings Program” under the subtractions from income section.

When using tax preparation software, you will be prompted to enter information about subtractions from your income. Navigate to the section for state-specific deductions and find the entry for 529 plan contributions, then enter the total amount you contributed up to the allowable limit.

State Tax Treatment of Withdrawals

In Arkansas, withdrawals used to pay for qualified higher education expenses are free from state income tax. These qualified expenses are broadly defined and include tuition, fees, books, supplies, equipment, and the costs of room and board for students enrolled at least half-time.

The earnings portion of a non-qualified withdrawal is subject to Arkansas state income tax. This means you must report the earnings as taxable income on your state return in the year the withdrawal is made.

If you take a non-qualified withdrawal from a 529 plan, the state may “recapture” any tax deductions you previously claimed for those contributions. This means the amount you previously deducted from your income for those specific contributions will be added back to your taxable income, effectively reversing the initial tax benefit.