Fed Tax Cut Creates Vexsome Issues For State Income Taxpayers - SanTan Sun News SanTan Sun News

Fed Tax Cut Creates Vexsome Issues For State Income Taxpayers

November 6th, 2018 SanTan Sun News
Fed Tax Cut Creates Vexsome Issues For State Income Taxpayers

By Howard Fischer

Capitol Media Services

Arizona individual taxpayers could end up being hit with an extra $236 million in taxes if the governor and lawmakers follow their regular practice of trying to keep the annual state income tax relatively simple.

Elected officials will have to decide soon whether Arizona should make the same changes in what’s deductible as Congress did earlier this year. Those changes will not only reduce federal income taxes but, with more generous standard deductions, also eliminate the need for many Americans to itemize.

But the financial hit to Arizona taxpayers could depend on what they do – and how they do it. With no action anticipated before the general election, any decisions could also be affected by politics.

Democratic gubernatorial hopeful David Garcia said he wants the state to totally revamp its income tax code, eliminating the current practice of linking it to the Internal Revenue Code.

Incumbent Gov. Doug Ducey, who has vowed never to raise taxes, refused repeated requests for an interview on the issue and whether the state should benefit – and taxpayers here pay more – because of the changes in federal tax law.

And then there’s the question of whether the Democrats seize control of either the House or Senate.

The issue of what the state needs to do stems from the fact that Arizona has for years been a “piggy-back’’ state.

Taxpayers here use the federal definition of income as a starting point for state tax forms. And, in most cases, the deductions allowed mirror what are allowed under federal tax law.

That simplifies the process of filing a state form. Once taxpayers have labored through the federal 1040, the Arizona 140 form is far simpler.

But Congress approved massive changes in the federal tax code designed to both lower taxes and simplify the process for many. A key element is that the feds now allow fewer deductions.

But the trade-off is a sharp increase in the standard deduction, going from $6,350 for individuals to $12,000, and double that for couples filing jointly. The result is that fewer people will choose to itemize.

What would be simplest for Arizona taxpayers is for the state to conform to the new federal law on what is deductible. That’s been the practice now for years.

But if Arizona adopts the new limits on federal deductions, that means higher taxes for many Arizonans who had been taking advantage of them.

Legislative budget staffers put the hit to individual taxpayers at close to $174 million a year if Arizona conforms its tax code to federal law. And the Department of Revenue, with its own calculations, has an estimate of more than $228 million.

Right now, Arizonans use line 37 of the federal form 1040 as the starting point for computing their state taxes. That’s what the IRS considers an individual’s “adjusted gross income.’’

But that FAGI is not absolute. It starts with taking an individual’s income and subtracting certain expenses, like moving and alimony.

For 2018, some of those subtractions are gone.

If Arizona wants to keep those subtractions, taxpayers could no longer use line 37 as that starting point for computing their state income taxes.

It’s even more complex than that.

After finding that new starting point comes the question of deductions.

The federal law repealed or modified various other deductions that would come on Schedule A of the federal form. These primarily include a cap on state and local tax deductions and repeal of a category of deductions for miscellaneous deductions like employee expenses and tax preparation fees.

The governor and lawmakers could maintain those deductions here. But that would require Arizonans to then go through the additional calculations.

Conversely, keeping life simple and conforming with the new federal limits on deductions would make the state taxes owed go up.

Arizona’s standard deduction of about $5,200 for individuals will not increase unless lawmakers and the governor approve.

So that leaves Arizonans who have these expenses still itemizing, even as they no longer need to itemize for the federal form 1040.

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