Gov. Ducey signs income tax conformity measure into law

Gov. Doug Ducey has signed into law a bill to adjust the state’s income tax code to recent federal tax changes, making it easier and more predictable for taxpayers to plan their finances and prepare and submit returns.

Arizona and other “piggyback” states that rely on federal rules as a starting point for calculating state taxes must either conform or leave taxpayers with different rules to deal with. Arizona’s computation of individual income taxes starts after taxpayers have calculated their federal adjusted gross income, while corporate income taxes here use federal taxable income as the starting point.

Senate Bill 1752, the legislation to conform in full to the recent federal changes, was approved unanimously in the House on Tuesday and unanimously in the Senate on Wednesday. Ducey signed it Wednesday evening.

Unusual 2020 tax rules

Congress initiated several important changes over the past year or so, largely to ease the economic fallout from the coronavirus pandemic, starting in 2020 and continuing through the American Rescue Plan enacted March 11 of this year.

Arizona earlier had agreed to extend the state’s individual return-filing deadline from the regular April 15 date to May 17, matching this year’s extended federal deadline, again to ease the fallout from the coronavirus pandemic.

Conforming to the actual tax changes also was considered important. Among recent federal changes, up to $10,200 of unemployment income per person was deemed tax-free in 2020 for people with income below $150,000. More than 2 million Arizonans received jobless benefits last year, most with household incomes below $150,000. Unemployment compensation normally is taxable.

Also, the federal government eased the tax burden on certain types of withdrawals from retirement plans, and it deemed Paycheck Protection Program loans forgivable, meaning tax-free, while still allowing businesses to take relevant deductions.

Retirement withdrawals last year could be treated as being spread over three years, potentially easing the tax

bite, and investors were given the unusual option of putting the money back into a retirement account to delay taxes. Retirement proceeds normally are fully taxable in the year taken.

Change would hit budget

Conforming isn’t without financial consequences for the state in terms of reduced tax collections.

The Arizona Department of Revenue has estimated that the hit to the state’s general fund from the 2020 federal legislation could approach $600 million over the next several years, plus an undetermined impact from the federal American Rescue Plan enacted last month.

However, the federal government has sent more money to Arizona and other states, and this cash infusion can cover some of the anticipated revenue shortfalls.

Tax professionals welcomed the developments.

“We’re grateful the Legislature unanimously adopted SB 1752 and appreciate the dedication to get this done. Conformity is always important and this year especially, so the quick turnaround from the adoption of the amendment to final passage is great news for Arizona CPAs and taxpayers,” said the Arizona Society of Certified Public Accountants.