Tax Preparation Changes in Arizona

PHOENIX — Residents in Arizona trying to get ahead on their 2025 income taxes might be caught off guard.

The state Department of Revenue usually provides forms and guidance for individuals filing taxes. Those who opt not to itemize their deductions will typically receive a standard deduction of $15,750, which is notably higher than the amount for married couples filing jointly.

However, there’s a catch: this isn’t actually set as Arizona law. The correct inflation-adjusted figure for this year is just $15,000.

Following this, Governor Katie Hobbs issued an executive order in November instructing the agency to create a new document outlining the tax cuts she intends to propose when the Legislature comes into session this week.

If the Republican-led Legislature doesn’t align with the Democratic governor’s plans, individuals who’ve already filed their taxes using the state-released forms will need to amend their returns.

Indeed, it appears that Hobbs may only move forward with the tax cuts she seeks if the Republican majority also achieves some of their desired cuts.

Underlying these discussions is HR 1, a significant bill passed last year by Congress that includes various tax cuts aimed at both individuals and businesses.

In general, Arizona lawmakers tend to modify laws to align with state regulations, often due to requests from local residents. If not, Arizonans who calculate their federal taxes—the base for their state taxes—will face additional calculations before submitting their state filings.

Full compliance with the adjusted figures would cost the state over $440 million, as noted by Congressional budget analysts.

Gov. Hobbs, running for re-election this year, favors what she terms her “middle-class tax cuts.” This would involve elevating the standard deduction, exempting tips and overtime from taxation, and widening the senior tax credit.

Senator J.D. Mesnard acknowledged that the Department of Revenue typically prepares tax returns with the expectation that lawmakers will adhere fully to the new regulations.

However, the Republican chair of the Senate Finance Committee expressed concerns, labeling the governor’s directive to state agencies to only reflect specific aspects of HR 1 as an unusual move.

“I see significant issues with the governor’s executive order influencing the Department of Revenue’s decisions,” he remarked, emphasizing that it intertwines politics with an area that shouldn’t be political.

Christian Slater, the governor’s assistant press secretary, defended the choice stating it benefits a large number of taxpayers and aims to provide clarity at the start of the tax season.

Still, that “certainty” hinges on whether a majority of lawmakers concur with Hobbs. Several Republicans have articulated a desire to enact the changes as part of a comprehensive plan that includes work breaks.

This could mean allowing businesses to quickly deduct expenses related to newly acquired equipment, thus lowering their taxable income. There’s also the option to deduct R&D costs immediately, along with an extra deduction for interest expenses.

Interestingly, the tax returns being prepared by the Department of Revenue lack this additional information. Yet, Slater confirmed it was a deliberate choice by the governor.

“She believes that provisions impacting corporations and wealthier individuals should be resolved in the budget negotiations,” he added.

Nonetheless, Hobbs is pushing for tax cuts to be addressed promptly at the Legislature’s opening session. At least some of her wishes seem likely to be granted quickly.

Mesnard indicated that the Republican majority intends to present the entire tax cut package, including elements not favored by the governor, as soon as the session commences.

They aim for a swift demonstration of compliance, allowing all taxpayers, particularly small businesses, to file their taxes efficiently.

Upon reaching the governor’s desk, Slater outlined a strategy featuring all tax cuts rescinded.

“Governor Hobbs is committed to providing immediate relief to middle-class Arizonans,” he said. “If Republicans pursue benefits for corporations and the wealthy, they’ll need to clarify how these changes will be funded without jeopardizing essential programs.”

“It’s unfortunate, and we’ll have to navigate this situation,” Mesnard commented regarding the governor’s ultimatum.

The prepared document also has another aspect to consider. Senator Mitzi Epstein pointed out that the redesigned main tax return, which reflects the governor’s directives, omits other elements the governor advocates for, like the tax exemptions on tips and overtime, as well as expanded deductions for seniors and interest deductions on new American-made cars.

Instead, taxpayers will need to compute these exemptions on a separate worksheet, which isn’t submitted to the Department of Revenue, before reporting them on another form labeled “other adjustments.”

Epstein, representing Tempe, voiced her discontent with this arrangement, calling it “far from appropriate.”

She also raised concerns regarding some federal provisions that the Democratic governor is trying to incorporate into the state tax code.

“The HR1 tax policy is generally quite problematic,” she remarked.

While acknowledging the intention to support workers in service roles and those working extra hours, she questioned the broader implications.

Epstein emphasized that tips are essentially part of a worker’s wages, noting legislation allows companies to pay employees below minimum wage if they can account for the difference through tips.

This, she argued, indicates that a tip is not merely a gift but rather compensation for work performed.

“Ultimately, without their labor, there wouldn’t be tips,” Epstein stated, defining tips as wages in essence.