All but seven states in the USA have their own form of individual income tax separate from Federal reporting required to the IRS. Unlike the Federal system, which applies a uniform tax system to everyone regardless of what state they live in, states with an income tax all have their own way of doing things. For example, some states start with Federal adjusted gross income (AGI) and work down to state AGI. Other states require taxpayers to start from the beginning and calculate their state AGI on its own. Still other states calculate income tax based on other factors, like Tennessee, which only taxes interest and dividends over a certain amount.
Arkansas has its own individual income tax system. It is similar to the Federal system, but has intricacies that taxpayers should be aware of so that they don't over- or under-pay.
Married filing separately on same return
This is a filing status available to married Arkansas residents. This form has two columns, one for the taxpayer and one for the spouse. Joint income is divided between the two columns, but income allocated to one or the other goes in its respective column. This is beneficial to married taxpayers where the taxpayer or spouse has a higher income than the other, because tax is calculated by taxpayer and spouse separately, then added together. The tax is usually lower than if calculated on joint income, like a Federal return.
Income differences
There are several types of income that are taxed differently by Arkansas than at the Federal level:
- Social security benefits - not taxable to Arkansas
- Distributions from qualified retirement plans - if they are taxable, Arkansas allows a $6,000 reduction in the taxable amount, both for taxpayer and spouse.
- Capital gains - only 70% of net capital gains are reported on the Arkansas tax return. However, up to $3,000 of losses can still be taken.
- Tax exempt interest - interest earned from municipal bonds is not taxable at the Federal level. However, in Arkansas it is taxable unless it is from an Arkansas source. For example, interest received from a New Orleans, Louisiana municipal bond is taxable in Arkansas, but interest received from a Little Rock, Arkansas municipal bond is not. Neither is taxable on the Federal return.
- Depreciation differences - Federal depreciation benefits such as Section 179 and bonus are different at the Arkansas level. Arkansas does not recognize bonus depreciation, and the Section 179 limits are much lower. Therefore, income from S-corps, partnerships, or farms could be different for Arkansas than Federal. Taxpayers should refer to an Arkansas-equivalent Form K-1 received from these entities.
Deduction differences
There are also several types of deductions that are different for Arkansas than on a Federal return:
- 529 plans - taxpayers that contribute to an Arkansas 529 plan for college savings are allowed an adjustment to income of up to $5,000 each for taxpayer and spouse. The contributions have to be made during the tax year, and they must be to an Arkansas 529 plan (not just any 529 plan).
- State tax deduction - unlike the itemized deduction schedule for Federal returns, Arkansas taxpayers cannot deduct state tax payments on their Arkansas income tax return as an itemized deduction. They can still deduct personal property and real estate taxes, but not estimated tax payments or withholding.
- Foreign taxes paid - instead of calculating the foreign tax credit like on the Federal return, all foreign taxes paid can be added in total as an itemized deduction on the Arkansas return.
Each state is different, so taxpayers should consult their tax advisor or their state department of revenue website for more information.