Arizona Retroactively Conforms to Tax Cuts and Jobs Act

Arizona retroactively conformed to income tax changes made by the Tax Cuts and Jobs Act. A bill signed by the governor on May 31, 2019, incorporated the federal law for the 2018 tax year. The bill also conformed to other federal acts that became effective during 2017.

2018 Tax Forms and Instructions

The governor vetoed an earlier tax conformity bill. That meant that Arizona did not conform to the new federal law as of the April 15 return filing deadline. But, the Department of Revenue produced the 2018 tax forms and instructions assuming that the state would conform. So, taxpayers who have already filed returns for 2018 do not need to amend those returns.

No New Arizona Additions or Subtractions

The conformity bill did not add any new Arizona additions or subtractions. It also did not change any existing addition or subtractions, such as for bonus depreciation.

Dividend Deductions Clarified

However, the bill clarified the deductibility of some dividends.

Foreign Dividends

Arizona will consider all of the following as foreign dividends that qualify for the Arizona corporate deduction for foreign dividend income:

  • gross-up income (IRC Sec. 78)
  • global intangible low-taxed income (GILTI) (IRC Sec. 951A)
  • subpart F income (IRC Sec. 952)

Federal Dividend Deductions

Arizona requires corporations to add back the dividend deductions allowed on the federal return for:

  • participation received dividends (IRC Sec. 245)
  • GILTI (IRC Sec. 250(a)(1)(B)

Offsetting Tax Cuts

The state expects conformity to the new federal law to increase state revenue. To offset the increase in revenue, individuals will get several tax breaks. These include:

  • lower personal income tax rates
  • a larger standard deduction
  • a new dependent tax credit

These changes take effect beginning in the 2019 tax year.

Late Reaction to Federal Tax Reform

Minnesota also updated its federal conformity retroactively after the 2018 return filing deadline. The developments in Arizona and Minnesota suggest that states may not be done addressing federal tax reform.

By Carolyn Kwock, J.D.

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