Tax Insights

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Arizona tax planning – 529 plans and charitable donation credits

Many taxpayers find themselves pondering ways to save a few dollars during tax filing season. Arizona taxpayers have a variety of options, and today we’ll be focusing on 529 plans and state tax credits for certain charitable donations.

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For taxpayers wanting to save for education costs for their children or grandchildren, a 529 plan is a great way to get started. Funds placed in a 529 account have the advantage of growing tax free, provided that they are used for qualified education expenses upon withdrawal. Qualified expenses include a wide range of college related costs, such as tuition, room and board, books and computer equipment. As part of the 2018 Tax Cuts and Jobs Act, 529 funds can now be used for K-12 tuition as well. In addition to these great benefits, taxpayers making contributions to a 529 plan can claim an Arizona state tax deduction in the year of their contribution – up to $2,000 for single taxpayers and $4,000 for married taxpayers. Lastly, 529 plans now allow even more flexibility for qualified use of funds thanks to the recent SECURE Act (Setting Every Community Up For Retirement), which was signed into law in late December 2019. This act allows up to $10,000 of 529 funds to be used for repayment of student loans. Taxpayers should note that the $10,000 is a lifetime limit, not an annual limit, and that any student loan interest paid with 529 funds will not be eligible for the student loan interest deduction, so as to avoid a “double-dip” on tax savings.

While a deduction is certainly nice, a credit is even better – and Arizona taxpayers have lots of opportunity to reduce their state tax bill on a dollar-for-dollar basis while also supporting some great organizations across the state. Following are the five primary credit programs that taxpayers can choose to participate in, and their related maximum allowable credit:

  • Qualified Charitable Organization, $400 single and $800 married
  • Qualified Foster Care Organization, $500 single and $1,000 married
  • Public school tax credit, $200 for single and $400 married
  • School Tuition Organization, $1,135 single and $2,269 married
  • Arizona Military Family Relief Fund, $200 single and $400 married

Donations qualifying for the above credits reduce your tax liability dollar-for-dollar – essentially allowing taxpayers to redirect their tax dollars to charities of their choosing, at no additional cost. Donations can be made during the tax year and even up until the filing deadline for the prior tax year; so 2019 donations can be made as late as April 15, 2020.

Before making donations, taxpayers will want to make sure that their charity of choice is qualified for the credit. The official lists of qualified organizations can be found here. Taxpayers should also keep in mind that donations resulting in a state tax credit are no longer eligible for a Federal deduction as well. This “double-dipping” was allowed until the middle of 2018 when the IRS decided that claiming a charitable deduction for a donation that effectively costs you nothing shouldn’t really count as a donation.

For more information on minimizing your Arizona tax liability, reach out to your trusted tax advisor.

Austin Bradley, CPA