Overview of Arizona Education Tax Benefits:
The state of Arizona does something that many other states refuse to. They let residents take a deduction for contributing to any state’s Section 529 Plan, not just their own.In other words, an Arizona resident who prefers the features of Rhode Island’s Section 529 Plan may contribute to that plan and still receive an Arizona income tax deduction. This gives parents the maximum flexibility in choosing a plan and investment manager that is right for them.
The Arizona income tax deduction for Section 529 plans is new for 2008, and is currently limited to $750 per taxpayer ($1,500 for joint returns). Additionally, future distributions from any Section 529 Plan are not includable for residents as income, to the extent that they are qualified education distributions.
Value of the Arizona Section 529 Tax Deduction:
If you are an Arizona resident trying to decide whether or not you should use the Section 529 plan versus other savings vehicles, you need to account for the potential tax savings of the deduction. Remember, Arizona residents can contribute to any state’s plan and still receive the deduction.Considering that the top tax bracket in Arizona is 4.54%, a $1,500 contribution to any Section 529 plan will save a married couple a maximum of $68 at tax time. In other words, receiving the deduction is similar to a 4.54% bonus on the amount contributed. For many taxpayers, this may not offset the benefits of using other accounts such as a Coverdell Education Savings Account (ESA).
Claiming the Deduction:
Since 2008 is the first tax year this deduction is being offered, it is currently unclear how it will be reported on the Arizona state income tax return.
