Arizona - Itemized Deduction Adjustment to State Income Taxes

[N_Tomsheck]

Are you as confused as I was about filling out Page #2 of the State of Arizona 2-page form "Arizona Schedule A / Itemized Deduction Adjustments / For Full-Year Residents Filing Form 140 / 2021"?

Turbo Tax seems (at first) to completely ignore this form.

After reading the very confusing reference on Page#1, line 7 to “contributions to a charity” and stewing on it all with my wife, we finally decided that we needed to populate our total Arizona state income tax withholdings for Tax Year 2021 into Page #1, Line 7 - "Adjustment to State Income Taxes".

But then HOW do we get the 7 lines of Page #2 “2021 Form 140 Schedule A / Adjustments to State Income Taxes” to be filled out?

Answer: We entered the amount of our total Arizona state income tax withholdings for Tax Year 2021 into STATE TAXES / Step-by-Step / “Adjustment to State Income Taxes.”

When I went to the Turbo Tax “Forms”, the 7 lines of Page #2 were automatically filled out!

Bottom line: Turbo Tax does a VERY POOR job of handling for the State of Arizona this particular adjustment to the Federal Itemized Deductions.  Especially since the Step-by-Step instruction says “Note: This is not common.”

I beg to differ.  Please, Community, correct me if I’m wrong, but this adjustment for State of Arizona withholdings (payments) would be required for anyone who populated this amount as “Taxes you paid” into line 5a of Federal form 1040, Schedule A - Itemized Deductions, and then also itemized on their State of Arizona tax return.

This is buttressed by the fact that the Page #2 form states "Arizona Revised Statutes Chapter 43-1042 was amended to require taxpayers to reduce the amount of itemized deductions for amounts used to claim an Arizona credit even if the amount was deducted on the federal return as state income taxed paid rather than as charitable contributions."

Turbo Tax: Get your act together and handle this in the future both better and with more clarity for the State of Arizona users (purchasers).

[DMarkM1 · Accepted solution]

TurboTax appears to be calculating correctly.  This all stems from Treasury Decision 9864 and relates to IRS Notice 2019-12.  This Treasury Decision requires taxpayers to reduce the charitable donations on a federal itemized return by an amount equal to a dollar for dollar state tax credit for charitable donations. 

Subsequently the notice states that taxpayers who after decreasing the amount of federal charitable contributions by the state tax credit amount received or expected to be received, can under safe harbor rules take the excess contribution as state taxes paid deduction.  

Therefore taxpayers who go back to their federal itemized deductions and reduce the charitable deduction and then add the deduction back to AZ state tax estimates paid in the federal interview must put that amount in the AZ "State Income Tax Adjustment" box.  This is done because you cannot get a deduction for an amount already taken as a credit on your AZ return. 

Once the adjustment is entered in the AZ adjustment box, the page two lines on the worksheet are used to account for the state and local tax deduction limitation (10,000) on the federal return.

Bottom line is if an AZ taxpayer has itemized deductions on their federal return, has donated to a charity and received an AZ tax credit for that donation, then the amount of the credit should go into the AZ State Income Tax adjustment box. 

The exception is if the taxpayer reduced the federal charitable donations by the state tax credit amount on the federal return, but the taxpayer did not take the state income taxes paid deduction under safe harbor rules, then no amount needs to go in the AZ adjustment box because a deduction was not taken.  

[N_Tomsheck]

Many thanks.

Since the amount of State income taxes that we entered on Federal Schedule A, line 5a for “Taxes You Paid” does not have any amount for “charitable contributions” then I will populate Arizona’s Schedule A, Page1, line 7 with zero.

I failed to properly focus on the key words “charitable contributions.”

Turbo Tax (State of Arizona): I stand corrected about The Step-by-Step instructions for the “Adjustment to State Income Taxes” – the “Note: This is not common” verbiage is indeed the case for this taxpayer and the calculations are handled correctly IF an amount is entered.