For AR, why is my out-of-state 529 contribution not deducting from my state taxes?

[bradcook6]

I contributed $10,000 to the Arkansas 529 plan and $6,000 to an out-of-state 529 plan in 2024. Arkansas allows deductions up to $10,000 for in-state and $6,000 for out-of-state contributions (married filing jointly). However, TurboTax only recognizes the in-state deduction.

[maglib]

Arkansas –

What are the deduction limits?

For single filers : $5,000 per year

For joint filers : $10,000 per year 

Taxpayers who contribute to an Arkansas plan can deduct up to $5,000 (or $10,000 total for a married couple) from their Arkansas adjusted gross income for the year such contributions are made.

When investing in a non-Arkansas 529 plan as an Arkansas resident, there is still a state income tax deduction, but it is only $3,000 for an individual filer and $6,000 for a couple filing jointly.

It is one or the other, not to exceed the in-state contribution.  

The amount though will still grow tax-free if used for education.

Do NOTE  ? You may contribute up to $18,000 per beneficiary annually ($36,000 for married couples making a proper election) with no gift-tax consequence. The Arkansas Brighter Future 529 Plan allows you to invest up to $500,000 per beneficiary in a lifetime.  

If you contribute to multiple plans in excess of the 18k in a year, you would have to file a gift tax form..

Applicable AR Tax Code: "(2)(A) The deductible contributions for a tuition savings account established under this chapter shall not exceed five thousand dollars ($5,000) per taxpayer in any tax year."

Arkansas Code Title 6. Education § 6-84-111. Funds exempt from tax--Definitions

(a)(1) Except as otherwise indicated in this chapter, interest, dividends, and capital gains from funds invested in the Arkansas Brighter Future Fund Plan or a tax-deferred tuition savings program established by another state under 26 U.S.C. § 529, as in effect on January 1, 2020, shall be exempt from Arkansas income taxes.

(2) For purposes of this section:

(A) “Taxpayer employee” means an employee of an employer with an account established under this chapter; and

(B) “Taxpayer employer” means a person that employs an individual with an account established under this chapter.

(b)(1) Contributions to a tuition savings account established under this plan may be deducted from the taxpayer's adjusted gross income for the purpose of calculating Arkansas income tax under § 26-51-403(b).

(2)(A) The deductible contributions shall not exceed five thousand dollars ($5,000) per taxpayer employee in any tax year.

(B) If the aggregate amount of contributions by a taxpayer during a tax year exceeds the limitation under subdivision (b)(2)(A) of this section, the unused aggregate amount may be carried forward to the next succeeding four (4) tax years.

(C) A taxpayer employer may make a matching contribution to the account of a taxpayer employee with an account established under this chapter that does not exceed five hundred dollars ($500) per contributing employee per year.

(3) Contributions to this plan that have been deducted from the taxpayer employee's adjusted gross income for prior tax years shall be subject to recapture from the taxpayer employee if the taxpayer employee:

(A) Makes a subsequent nonqualified withdrawal from the account; or

(B) Rolls the account over to a tax-deferred tuition savings program established by another state or institution under 26 U.S.C. § 529, as in effect on January 1, 2020.

(4)(A) The contribution shall be recaptured by adding the amount previously deducted, not to exceed the amount of the nonqualified withdrawal or rollover, to the taxpayer employee's adjusted gross income for the tax year in which the nonqualified withdrawal or rollover occurred.

(B) The nonqualified withdrawal or rollover shall be taxable to the taxpayer employee, party, account owner, or designated beneficiary who actually makes the nonqualified withdrawal or rollover.

(c)(1)(A) For tax years beginning on or after January 1, 2017, contributions to a tuition savings account established under this plan or a tax-deferred tuition savings program established by another state under 26 U.S.C. § 529, as it existed on January 1, 2017, may be deducted from the taxpayer's adjusted gross income for the purpose of calculating Arkansas income tax under § 26-51-403(b).

(B) A taxpayer may not deduct from the taxpayer's adjusted gross income a contribution to a tax-deferred tuition savings program established by another state if the taxpayer deducted the contribution in another state or on another state's income taxes.

(2)(A) The deductible contributions for a tuition savings account established under this chapter shall not exceed five thousand dollars ($5,000) per taxpayer in any tax year.

(B) If the aggregate amount of contributions by a taxpayer during a tax year exceeds the limitation under subdivision (c)(2)(A) of this section, the unused aggregate amount may be carried forward to the next succeeding four (4) tax years.

(C) The deductible contributions for a tax-deferred tuition savings program established by another state under 26 U.S.C. § 529, as it existed on January 1, 2017, shall not exceed three thousand dollars ($3,000) per taxpayer in any tax year.

(D) The deductible contributions for a tax-deferred tuition savings program established by another state under 26 U.S.C. § 529, as it existed on January 1, 2017, that are rolled over into a tuition savings account established under this chapter shall not exceed seven thousand five hundred dollars ($7,500) per taxpayer in the tax year in which they were rolled over.

(d)(1)(A) For tax years beginning on or after January 1, 2018, contributions to a tuition savings account established under the plan or a tax-deferred tuition savings program established by another state under 26 U.S.C. § 529, as it existed on January 1, 2018, may be deducted from the taxpayer's adjusted gross income for the purpose of calculating Arkansas income tax under § 26-51-403(b).

(B) A taxpayer may not deduct from the taxpayer's adjusted gross income a contribution to a tax-deferred tuition savings program established by another state if the taxpayer deducted the contribution in another state or on another state's income taxes.

((2)(A) The deductible contributions for a tuition savings account established under this chapter shall not exceed five thousand dollars ($5,000) per taxpayer in any tax year.

(B) If the aggregate amount of contributions by a taxpayer during a tax year exceeds the limitation under subdivision (d)(2)(A) of this section, the unused aggregate amount may be carried forward to the next succeeding four (4) tax years.

(C) The deductible contributions for a tax-deferred tuition savings program established by another state under 26 U.S.C. § 529, as it existed on January 1, 2018, shall not exceed three thousand dollars ($3,000) per taxpayer in any tax year.

(D) The deductible contributions for a tax-deferred tuition savings program established by another state under 26 U.S.C. § 529, as it existed on January 1, 2018, that are rolled over into a tuition savings account established under this chapter shall not exceed seven thousand five hundred dollars ($7,500) per taxpayer in the tax year in which they were rolled.

(e)(1)(A) For tax years beginning on and after January 1, 2021, contributions to a tuition savings account established under the plan or a tax-deferred tuition savings program established by another state under 26 U.S.C. § 529, as in effect on January 1, 2020, may be deducted from the taxpayer's adjusted gross income for the purpose of calculating Arkansas income tax under § 26-51-403(b).

(B) A taxpayer may not deduct from the taxpayer's adjusted gross income a contribution to a tax-deferred tuition savings program established by another state if the taxpayer deducted the contribution in another state or on another state's income taxes.

(2)(A) The deductible contributions for a tuition savings account established under this chapter shall not exceed five thousand dollars ($5,000) per taxpayer in any tax year.

(B) If the aggregate amount of contributions by a taxpayer during a tax year exceeds the limitation under subdivision (e)(2)(A) of this section, the unused aggregate amount may be carried forward to the next succeeding four (4) tax years.

(C) The deductible contributions for a tax-deferred tuition savings program established by another state under 26 U.S.C. § 529, as in effect on January 1, 2020, shall not exceed three thousand dollars ($3,000) per taxpayer in any tax year.

(D) The deductible contributions for a tax-deferred tuition savings program established by another state under 26 U.S.C. § 529, as in effect on January 1, 2020, that are rolled over into a tuition savings account established under this chapter shall not exceed seven thousand five hundred dollars ($7,500) per taxpayer in the tax year in which they were rolled over.

(f)(1) Qualified withdrawals from a tuition savings account established under this plan or a tax-deferred tuition savings program established by another state under 26 U.S.C. § 529, as in effect on January 1, 2020, will be exempt from Arkansas income tax with respect to the designated beneficiary's income.

(2)(A) Nonqualified withdrawals from a tuition savings account established under this plan or a tax-deferred tuition savings program established by another state under 26 U.S.C. § 529, as in effect on January 1, 2020, will be subject to Arkansas income tax.

(B) The nonqualified withdrawal will be taxable to the party, account owner, or designated beneficiary who actually makes the withdrawal.

(g) Any earnings on the contribution that are included in the refund will be subject to Arkansas income tax if an account owner receives a refund of contributions to a tuition savings account established under this plan or a tax-deferred tuition savings program established by another state under 26 U.S.C. § 529, as in effect on January 1, 2020, because of either:

(1) The death or disability of the designated beneficiary; or

(2) A scholarship, allowance, or payment described in 26 U.S.C. § 135(d)(1)(B) or (d)(1)(C), as in effect on January 1, 2018, received by the designated beneficiary.

[bradcook6]

"It is one or the other, not to exceed the in-state contribution."

Can you point out where in the tax code this is stated? I am having trouble finding it, and other sources I'm reading are suggesting these contributions are not mutually exclusive.

Really appreciate the help!

[maglib]

@bradcook6  I posted the tax code in the post,  it was edited immediately after commenting.

The total cannot exceed $5k.

[bradcook6]

My point in asking is that i do not see anything in the tax code that states the in and out of state contributions should be treated as a total.

I've copied the tax code into ChatGPT, and have been interrogating it there. It has some compelling arguments that make me believe my assumption is correct. Unless have missed something else.

Here's one of the responses I got for reference:

That’s a fair perspective, and I understand why someone might interpret the statute that way. However, the text of the law does not indicate that the deduction is an either-or situation. Here’s why:

1. The Law Allows Deductions for Both In-State and Out-of-State 529 Plans

• § 6-84-111(e)(1)(A) explicitly states:

  "For tax years beginning on and after January 1, 2021, contributions to a tuition savings account established under the plan or a tax-deferred tuition savings program established by another state under 26 U.S.C. § 529, as in effect on January 1, 2020, may be deducted from the taxpayer's adjusted gross income for the purpose of calculating Arkansas income tax under § 26-51-403(b)."

• This sentence confirms that both types of contributions are deductible—it does not say a taxpayer must choose one or the other.

2. The Law Uses Separate Deduction Limits

• § 6-84-111(e)(2)(A) applies to Arkansas 529 contributions, capping them at $5,000.
• § 6-84-111(e)(2)(C) applies to out-of-state 529 contributions, capping them at $3,000.
• If the intention were to force a choice, the law should have stated something like:
  "A taxpayer may deduct up to $5,000 in total, including both in-state and out-of-state contributions, but no more than $3,000 from an out-of-state plan."
  It does not say this. Instead, it sets two distinct limits.

3. The Carryforward Rules Apply Separately

• § 6-84-111(e)(2)(B) allows carryforward of excess Arkansas 529 contributions for up to four years.
• The carryforward rule does not apply to out-of-state 529 contributions, meaning the law treats these as separate categories.
• If out-of-state contributions were just an alternative to in-state contributions, why wouldn’t they also have a carryforward provision?

4. The Either-Or Argument Would Make (e)(2)(C) Redundant

If the total deduction was limited to $5,000, then (e)(2)(C) would have no purpose because:

• A taxpayer who contributed $5,000 to an Arkansas 529 would already hit the cap.
• A taxpayer who contributed $3,000 to an out-of-state 529 would still have $2,000 unused deduction room, but they wouldn't be allowed to contribute more to take advantage of it.
• The law could have just said: "Taxpayers may deduct up to $5,000 in total for contributions to any 529 plan." But it does not say that.

5. The Lack of Express "Either-Or" Language

• Many tax codes that require an either-or choice use explicit language to state the limitation.
• Arkansas does not say, "A taxpayer may deduct either up to $5,000 for an Arkansas 529 or up to $3,000 for an out-of-state 529, but not both."
• Instead, it sets two independent limits.

6. The Most Logical Interpretation

The law clearly allows:

• Up to $5,000 in deductions for Arkansas 529 contributions.
• Up to $3,000 in deductions for out-of-state 529 contributions.
• The absence of an explicit overall cap means that these two deductions can be combined.

Final Answer

Your total deduction is not limited to $5,000. You can deduct $5,000 for an Arkansas 529 plus $3,000 for an out-of-state 529, for a total deduction of $8,000.

If someone argues otherwise, they must point to an explicit provision in the tax code that imposes a $5,000 total cap, which does not appear to exist.

Would you like help drafting a response to the person challenging your interpretation?