USA – ARKANSAS Law and Practice Contributed by: Aaron Bundy and Danya Bundy, Bundy
1. Tax 1.1 Tax Regimes
able to the survivor by timely election, with a simplified late election available for up to five years for estates below the filing threshold. The generation-skipping transfer exemption matches the lifetime exemption but is not portable, so deliberate GST allocation belongs in every sizable plan. Transfers between spouses who are US citizens qualify for the unlimited marital deduc - tion, and the annual exclusion for gifts to a non-citizen spouse is USD194,000 for 2026. Transfers to qualify - ing charities are deductible without limit for gift and estate tax purposes. 1.3 Income Tax Planning Arkansas is a favourable income tax state for a liquid - ity event. Only 50% of the net capital gain from assets held more than one year is taxed, under Section 26-51- 815 of the Arkansas Code Annotated, which cuts the effective top rate on long-term gains to roughly 1.85% at the new 3.7% rate. Even better, net capital gains in excess of USD10 million in a tax year are exempt entirely. For a founder selling a closely held company, the state tax on the sale can be negligible, and we have seen relocation decisions turn on this feature. Founders can often stack the expanded federal quali - fied small business stock exclusion on top. Arkansas allows a pass-through entity tax election, letting partnerships and S corporations pay state tax at the entity level at the top individual rate and pre - serve the federal deduction notwithstanding the fed - eral cap on state and local tax deductions. The 2025 federal legislation kept that cap, with a phase-down at high incomes, and left the entity-level workaround intact, so the election matters most for exactly the owners the phase-down catches. Contributions to the Arkansas Brighter Future 529 plan are deductible up to USD5,000 per taxpayer and USD10,000 for joint filers. Basis planning follows federal law, so assets held until death take a fair market value basis under Section 1014 of the Internal Revenue Code, and holding low- basis assets remains the simplest tool available. The risks are the standard ones. Residency and domicile are scrutinised when a taxpayer claims to have moved before a large gain, the one-year holding line sepa - rates 50% taxation from full taxation, and source rules still capture Arkansas-source income of nonresidents.
Arkansas has no estate tax, no inheritance tax, no gift tax, and no generation-skipping transfer tax. Its old estate tax was a pick-up tax tied to the federal state death tax credit and died with it. It has applied to no death since 1 January 2005, and no revival effort has advanced. Transfer taxation for Arkansas clients is a federal matter. For 2026, the federal estate, gift, and generation-skipping transfer tax exemption is USD15 million per person, indexed for inflation after 2026. Arkansas imposes a personal income tax on individu - als and on estates and trusts, and the rates keep fall - ing. A special session in May 2026 cut the top individ - ual rate from 3.9% to 3.7%, retroactive to 1 January 2026, and cut the top corporate rate from 4.3% to 4.1% beginning 1 January 2027, the fourth cut since 2023. Capital gains receive the favourable treatment described in 1.3 Income Tax Planning . Local governments rely on ad valorem property tax - es, modest by national standards and constrained by Amendment 79 to the Arkansas Constitution through assessment caps, a senior and disability freeze, and a homestead credit of USD600 for 2026, rising to USD675. State and local sales and use taxes apply broadly, although the state sales tax on groceries was eliminated effective 1 January 2026. Corporations and limited liability companies pay a small annual fran - chise tax. No Arkansas city or county levies a local income tax, and the code forbids one. 1.2 Exemptions With no state transfer taxes, exemption planning is federal. A donor may give USD19,000 per recipient in 2026 without touching the lifetime exemption, and spouses may combine annual exclusions. Direct pay - ments of tuition to a school or of medical expenses to a provider are excluded from gift tax without limit under Section 2503 (e) of the Internal Revenue Code and are also excluded from generation-skipping trans - fer tax. The federal lifetime exemption of USD15 million per person applies to lifetime gifts and transfers at death, and a deceased spouse’s unused exemption is port -
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