Finally – Arizona Tax Law Conformity Clarification

After waiting the entire initial income tax filing season, and then some, for word from Arizona regarding a decision related to whether Arizona would conform to the newly enacted federal Tax Cuts and Jobs Act, we finally received clarity. On May 31, 2019, the Arizona Department of Revenue issued guidance for individual income taxpayers.

For tax year 2018, Arizona conforms to the Internal Revenue Code. The 2018 Arizona tax forms that most taxpayers have now already filed assumed conformity and are, therefore, accurate. No action is required of taxpayers who have already filed, and no adjustments are needed for those that have not yet filed their 2018 Arizona income tax returns.

For tax year 2019 and future years, Arizona individual income tax returns will include the following adjustments:

• Match the federal standard deduction amount ($12,200 single/married filing separate, $18,350 head of household, $24,400 married filing joint).
• Remove Arizona’s personal and dependent exemption amounts.
• Provide $100 child tax credit per dependent under 17 years of age and $25 for dependents 17 and older. The credit is phased out for federal adjusted gross income greater than $200,000 single/married filing separate and head of household, $400,000 married filing joint.
• Allow taxpayers to increase the standard deduction by 25% of the charitable donations that would have been claimed as an itemized deduction.

The changes also establish four tax brackets from the previous five tax brackets. In essence, the previous lowest two brackets of 2.59% and 2.88% would be collapsed into one bracket of 2.59% and the remaining three brackets are reduced very slightly from their previous percentages. The income thresholds for each of the highest three brackets would be virtually the same as they were before. The highest Arizona tax bracket (those with taxable income higher than $159,000 (single) and $318,000 (married)) will now be 4.50% compared to the previous 4.54%.

We held off on finalizing client tax returns in early February for a week or two anticipating that Arizona would make a final decision then about conformity, but that clarification never came as the governor vetoed the bill passed by the Arizona legislature that would have provided clarification. It took until May 31st to finally receive clarification on this issue. Luckily, the decision they made did not require any adjustments to all the 2018 Arizona returns that have already been filed.

If you have any questions about the new Arizona tax conformity decision, please contact us.