I’m using TurboTax to file my 2024 federal and Arizona state returns. I made two donations that qualify for Arizona state tax credits:
- $400 to a public school (AZ Public School Tax Credit)
- $1,000 to a qualifying foster care organization (QFCO credit)
I am correctly treating these donations as state tax payments on my federal return, not as charitable contributions, in accordance with IRS Notice 2019-12 and Revenue Procedure 2019-12, which establish a safe harbor allowing certain state tax credit donations to be deducted as state and local taxes (SALT) under IRC §164, rather than under the disallowed charitable contribution deduction under IRC §170(c).
IRS Notice 2019-12, Section 3.01:
“If a taxpayer makes a payment to or for the use of an entity described in § 170(c) and receives or expects to receive a state or local tax credit in return for such payment, the taxpayer may treat the payment as a payment of state or local tax for purposes of §164 in the tax year in which the payment is made…”
However, the issue I’m running into is that TurboTax is automatically importing this $1,400 amount (entered as a state tax payment on the federal return) into my Arizona return as if it were an actual tax payment. This is incorrect, because while these donations reduce my Arizona tax liability via credits, they do not represent actual payments made to the Arizona Department of Revenue.
As a result, my Arizona return is now showing an inflated refund — incorrectly treating the $1,400 donation as both a tax payment and as a credit, when in reality it should be only a credit on the state side, and only a deduction on the federal side (as a SALT deduction, subject to the $10,000 cap under §164(b)(6)).
