Changes in Arizona tax rules may require amended returns

State must decide if it will automatically calculate adjustments

Hundreds of thousands of Arizonans, possibly more, got a break last week when the state agreed to adopt retroactive federal tax rules that made their unemployment benefits tax-free for 2020.

But the case isn’t closed, as many of these people still might need to file an amended state return to take advantage of the change.

Arizona last week moved to adopt or “conform” to recent federal tax changes on unemployment benefits and several other issues, clarifying and simplifying the filing of state returns for individuals and businesses.

What happens next is still up in the air.

The state Department of Revenue might follow in the footsteps of the Internal Revenue Service, which is calculating adjustments automatically for affected taxpayers, or it might require them to file amended returns.

The department issued a statement Friday saying it is “analyzing this situation and will post additional guidance soon.”

Following the decision to conform earlier in the week, John Baumer of the Arizona Society of CPAs said that for Arizona taxpayers who previously filed state returns assuming conformity, they won’t need to file again — unless they received unemployment compensation last year and already filed.

As things stand currently, those people would need to amend their state returns to reap the benefit of the changes, said Baumer, the group’s director of government relations.

Confusing matters, some tax-software programs made adjustments after the federal change under the assumption Arizona would conform, making an amended return unnecessary for people who filed during this period.

What conforming means, so far

Still, Arizona’s decision to adopt the federal changes will help clarify things for taxpayers.

By adopting the conformity statute, lawmakers who passed the measure unanimously, and Gov. Doug Ducey who signed it April 14, agreed that Arizona won’t tax those benefits for 2020, either.

Arizona also effectively adopted several other federal changes. One involves more lenient tax treatment for 2020 on withdrawals made from retirement accounts. Another involves taxfree treatment of Paycheck Protection Program loans, for which businesses still may take relevant deductions.

Those changes, like the one involving unemployment benefits, were made to ease financial disruptions from the COVID-19 pandemic and resulting job losses.

Importance of jobless benefits

But the unemployment issue looms especially large because of the potential number of Arizonans affected, and the department made specific reference to it in its conformity notice Friday.

The federal government in March decided not to tax up to $10,200 per person in jobless benefits received in 2020, for those with household income below $150,000.

Normally, such compensation is taxable.

More than 2 million Arizonans received these benefits in 2020, and most recipients have a household income below $150,000, making at least some benefits tax-free.

Regardless of what happens next, Arizona earlier gave taxpayers some breathing room by extending the filing deadline from the normal April 15 to May 17, to match this year’s unique extension of the federal deadline. However, Arizonans required to make firstquarter estimated tax payments still needed to do so by April 15.