You should receive a form 1099-Misc showing the payment. Here is the AZ reference. The rebate is taxable at the federal level but not by AZ. Enter that form 1099-Misc information in the federal "Wages & Income" section using the "Other Common Income" dropdown to find the "1099-Misc" topic. This will add the income to your federal adjusted gross income.
In the AZ state interview you will subtract the amount. You will arrive a page titled "Adjustment for the Arizona Families Tax Rebate" where you enter the amount from your 1099-Misc. This will be subtraction from AZ taxable income on your AZ form 140.
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