Budget would reduce tax rates for many

Most shouldn’t need to amend their 2018 returns

The Arizona budget agreed to by Gov. Ducey and lawmakers last week offers a bit more simplicity, and should lower tax bills slightly, for most of the state’s residents.

If you’re a middle-class wage earner, figure on saving maybe 20 to 70 cents for each $1,000 of marginal income from the new, lower tax rates.

“There’s a little reduction in rates, but nobody will get too excited about that,” said Cord Armstrong, a certified public accountant and managing director of the Phoenix of accounting firm CBIZ MHM.

The package boosts the state’s standard deduction, cuts tax rates slightly and otherwise adopts or conforms to most of the changes ushered in by federal tax reform in late 2017. As Arizona budget negotiations dragged on past the April 15 tax-return filing deadline, there had been concern some taxpayers might need to file amended 2018 returns, but local tax experts said most people won’t need to make retroactive changes.

“The 2018 returns are fine,” said Ed Zollars, a certified public accountant at Thomas, Zollars & Lynch in Phoenix. “Don’t worry about them.”

One lingering concern was whether Arizona would again use the federal definition of adjusted gross income as the starting point for preparing Arizona tax returns, with similar deductions, exemptions and more. The final legislation does use that definition, for both 2018 and 2019.

Modestly lower tax rates

The legislation slightly lowers rates and will subject a bit more people to taxation at the state’s lowest rate, 2.59 percent, which remains as it was before. The big change here was reducing the number of brackets for individuals from five to four. This was done by including people earning between $10,601 and $26,500 to taxation at the lowest 2.59percent rate. Previously, people in this group paid a 2.88-percent marginal rate.

The difference between 2.88 percent and 2.59 percent is equivalent to a tax cut of $2.90 for each $1,000 in income. Higher-earning Arizonans will benefit from even smaller changes as their income climbs — tax cuts of between 20 and 70 cents for each $1,000 in income, depending on the bracket.

Rather than tax rates, the more significant change was made to the state’s standard deduction, more than doubling this amount and thereby making it less advantageous to itemize. About 38 percent of Arizonans itemized in tax-year 2017, according to the Department of Revenue. That could drop by half or more in coming years.

The package also eliminates personal and dependent exemptions but replaces them with tax credits of $100 for each dependent under 17 years old and $25 for each dependent ages 17 and older. These credits phase out for single taxpayers with more than $200,000 in adjusted gross income and $400,000-plus for married couples filing jointly.

New rule on charity deductions

Lawmakers carved out a modest tax break that will benefit nonprofit groups. They did this by allowing taxpayers who take the standard deduction to increase it by 25 percent of their charitable contributions — meaning people who don’t itemize still could deduct one-quarter of their charitable donations.

That differs from the relatively new federal tax rules, under which charity donations can’t be deducted at all, except by people who itemize.

But with only one in four charity dollars deductible for people who take the new, higher Arizona standard deduction, this tax break won’t be high in dollar terms.

Zollars called it more of a “psychological” benefit that charities can tout in their marketing campaigns.

“People will think they’re still getting something by giving to charities,” he said.

Arizona’s popular tax credits weren’t affected by the budget changes, meaning taxpayers still may take them, even if they don’t itemize. Credits are dollar-for-dollar tax reductions, as opposed to deductions, which lower taxable income. Arizona’s credits can be claimed for donations that support publicschool extracurricular activities, private-school scholarships, local charities, foster-care groups and so on.

Arizona treats medical deductions differently from the federal rules. Medical expenses remain fully deductible here, while these costs can be deducted on federal returns only to the extent they exceed 10 percent of adjusted gross income, starting in 2019.

Lottery winners won’t like one provision of the new Arizona rules.

“You used to be able to subtract up to $5,000 from your gross income” to reflect wins of at least that size, said Armstrong. The legislation did away with that tax break.

New tax-bracket details

The proposal would collapse the current five state brackets for individuals to four, from five brackets previously:

❚ Under prior law, taxpayers with up to $10,600 in income pay a 2.59-percent rate, and those earning $10,601 to $26,500 pay 2.88 percent. Now, anyone earning up to $26,500 would pay 2.59 percent.

❚ Taxpayers now pay 3.34 percent on earnings between $26,501 and $53,000, down slightly from 3.36 percent before.

❚ Taxpayers now pay 4.17 percent on income between $53,001 and $159,000, down from 4.24 percent before.

❚ People now pay a top rate of 4.5 percent on income of $159,001 and up, down from a prior top rate of 4.54 percent.

As noted, the legislation increases the state’s standard deduction, too. For single people and married spouses filing separately, the standard deduction rises to $12,000 from $5,312 before. For married couples filing jointly, the standard deduction increases to $24,000 from $10,613. It rises to $18,000 from $10,613 for single heads of household.