Need Help: Safe Harbor Donation Carried to AZ as Tax Payment

Thank you for the response — I appreciate the clarification on the Arizona side. I agree with your points: the donations to Arizona public schools and foster care charities must be entered on Forms 322 and 352, respectively, to receive the state tax credits. I’ve already completed that in the Arizona section, and the credits are being applied correctly.

However, my issue is with how TurboTax handles the federal return, and more specifically, how it automatically pulls those amounts into the Arizona return as if they were actual tax payments, which they are not.

Per IRS guidance — including IRS Notice 2019-12 and Revenue Procedure 2019-12 — when a taxpayer receives or expects to receive a state or local tax credit in return for a charitable contribution, they cannot deduct that payment as a charitable contribution under §170(c). However, the IRS allows that amount to be treated as a state tax payment under §164 (i.e., part of the SALT deduction), subject to the $10,000 cap.

As the IRS stated:
"The U.S. Department of the Treasury and the Internal Revenue Service today issued final regulations that require taxpayers to reduce their charitable contribution deductions by the amount of any state or local tax credits they receive or expect to receive in return."
— Treasury press release on Final Regulations, June 2019

And further clarified in IRS Notice 2019-12:
“A taxpayer may treat the disallowed charitable contribution as a payment of state or local tax under section 164 in the year the payment is made.”

Accordingly, on my federal return, I entered the $1,400 in donations as a state tax payment, not as a charitable deduction — consistent with IRS guidance — to preserve part of my SALT deduction.

The problem is that TurboTax then automatically carries that SALT entry into my Arizona return and treats it as a state tax payment to AZDOR, which artificially inflates my refund. That $1,400 should only be treated as a credit on the Arizona side — not a payment. This results in a duplicate benefit, which violates the correct treatment of tax credits and payments.

My Question:

How can I stop TurboTax from importing the federal SALT deduction into the Arizona return as a tax payment, given that these donations were not paid to AZDOR and are already accounted for via AZ credits?

Thanks again — I’m just trying to make sure the treatment is consistent with both federal and state law, and that TurboTax doesn’t inadvertently overstate my refund.

@Lena11 

Yes, there is a screen in the Arizona state return that allows you to make an adjustment to your state income tax deduction. 

Please see my edited response with instructions above.

@TheSchulteMeistr 

I have been having this problem for years with online TurboTax. I have complained for years, and there has been no fix. It's been incredibly frustrating. One year, I spent like five hours on the phone with someone at TurboTax and they couldn't fix it. 

The trouble is that when you follow the directions in Turbo tax, here is what happens: You take the amount you contributed to the non-profit to get the AZ tax credit; then (per the TurboTax instructions), you move that amount from charitable contributions in your federal return to estimated taxes paid to AZ in your federal return. But when you do that, TurboTax thinks you actually paid that amount in taxes to Arizona (rather than just recharacterize it to fall within the safe harbor). As a result, TurboTax incorrectly balloons your Arizona tax refund because it thinks you paid more in state taxes to Arizona than you did.
I have never been able to find a workaround. So I am pleading with Turbotax to fix its software for next year.