Parents Reap Tax Savings Benefits With The Arizona 529 Tax Deduction

Parents can reap the benefits of an Arizona 529 tax deduction by investing in a college savings plan for their child's educational future. Arizona has two college savings plans which allow a $1,500 state tax deduction each year for married couples who file jointly. Single and/or head of household filers receive a $750 Arizona 529 tax deduction.

The following information outlines the additional advantages and important rules regarding the tax deduction. You should discuss how the deduction applies to your specific circumstances with a tax, legal or financial advisor.

You can only take advantage of the Arizona 529 tax deduction through the Fidelity Arizona College Savings Plan managed by Fidelity Investments and the Waddell & Reed InvestEd Plan which is managed by the Waddell & Reed investment firm. You must be an Arizona state tax payer to receive the deduction.

There are no income limits for taking the Arizona 529 tax deduction. Neither the state of Arizona nor the Arizona Commission for Postsecondary Education insures or guarantees the investments. You will need to contact the financial institution which manages your account for additional information.

Even though you must be an Arizona state tax payer to benefit from the deduction, the beneficiary of the 529 college savings plan does not have to be an Arizona resident. He or she can live in any state and use the funds to attend any eligible institution in the United States or abroad.

Parents are not the only ones who can take advantage of the Arizona 529 tax deduction. A grandparent, aunts, uncles - anyone who makes contributions to an Arizona 529 college savings plan - is eligible to take the state tax deduction as long as they pay Arizona income taxes.

You may open a college savings account for more than one beneficiary, but you cannot claim the maximum Arizona 529 tax deduction for each beneficiary. The maximum state tax deduction can include contributions to more than one account, but the total cannot exceed the maximum allowed.

If your beneficiary receives a scholarship, becomes disabled, or dies, you can withdraw the assets without incurring the 10 percent federal tax penalty. In cases of scholarships, you can only withdraw the value of the scholarship from your 529 savings account and not be penalized. However, you will be expected to pay federal income taxes for either scenario. Additionally, funds in an existing 529 plan can be rolled over or transferred into another account in the Arizona Family College Savings Program without penalty once per calendar year. However, please keep in mind that it must be a rollover, and not a withdrawal. Otherwise, it will be handled as an unqualified withdrawal subject to penalties and taxes.