How to Enter AZ Tax Credits in Federal and AZ Return when Itemizing

[ken_311]

I am itemizing both my Federal and State tax returns.  It's a joint return and we have $6083 in AZ tax credits, which is several thousand dollars larger than what we owe in 2025 for AZ tax so we will have AZ state tax credit carryovers.  I believe there is a safe harbor rule that allows you to enter the tax credits as state tax paid to allow you to claim them as deductions on your federal return.  

If I enter the $6083 in AZ tax credits as AZ taxes withheld Turbotax believes I should get this as a refund.  This isn't really correct as I believe the safe harbor rule is only allowing you to claim the AZ tax credits as state tax paid in your schedule A (which reduces your federal taxable income).  It isn't actually AZ taxes that I paid.

Instead I can enter the $6083 as other taxes paid (Schedule A, Line 6) but then Turbotax does not subtract the $6083 from my Schedule A in the AZ Schedule A.  In the state return I entered $6083 as the amount of state taxes deducted on Federal Schedule A.  When I view the AZ schedule A in Forms mode I can see the $6083 entered in "adjustment to state income taxes" box above Line 7 but isn't placed in Line 7 of the AZ return.

How can I enter my AZ tax credits correctly in both my Federal and State Return?

Thanks,

Ken

[AmyC]

Follow these steps to enter AZ tax credits in federal: 

1. Open your return to federal deductions and credits section. 
2. Locate estimates and other taxes paid.
3. Choose Estimated Taxes
4. Locate Other Income Taxes Paid in 2025
5. Withholding not already entered on a W2 does not describe the situation, but it works.
6. Select AZ
7. Enter the amount

This allows the tax credit to go on your Sch A.

Remove the tax credit inside AZ:

1. Begin the Arizona State Interview.
2. Navigate to the section for Itemized Deductions.
3. Look for a screen titled "Adjustments to State Income Taxes" or "Charitable Contributions for which a Credit is Claimed."
4. Enter the $6,083 here.

To get the AZ credit:

1. Continue through AZ passing additions and subtractions
2. continue to Additional Standard Deduction for Charitable Contributions
3. Locate Contributions for Which You are Claiming and AZ credit
4. Enter $6.083.
5. Continue
6. Enter donation in its category.
7. Check form 301 summarized your credits and calculated any carryover.

[ken_311]

I tried this method and it does correctly add the tax credit as state taxes paid to the Federal Schedule A (Line 5a) as well as correctly adjust the AZ Schedule A (AZ Schedule A lines 7 & 10).  Unfortunately, Turbotax believes the State Withholding that I entered is really withholding and is incorrectly stating that I had state income tax withheld (AZ form 140, Line 53).  This results in receiving both the state tax credit (AZ form 140 line 59) as well as the withholding.  This is incorrect as it isn't state tax that was withheld.  It appears to me that entering the tax credit as "Withholding not already entered on a W2" does not work correctly.

I need a method to:

1.  Add the tax credit to the federal return as state taxes paid that will flow to my Federal Schedule A since I am itemizing my Federal (and State) returns.

2. Adjust my total itemized deductions from Federal Schedule A to reduce it by the state taxes paid on the AZ Schedule A. 

3. Not include any state tax withheld on my state return.

The method you provided only addresses steps 1 & 2.  I need a method to accomplish all three steps

Ken

[AmyC]

Let's change the federal section. Other taxes paid in 2025  needs to be switched to an entry for tax paid in 2025 for a prior year. This puts it on the federal without moving it to the state. This should solve all the problems quickly and easily. Progress!

[ken_311]

This does work but I don't like that I am entering information in my tax return that is not technically correct.  I didn't not have any state taxes paid in 2025 for an earlier year.  If I get audited but the IRS, for example, I guess I will defend what I did by stating that this is the only way for me to enter the tax credits as state taxes paid using Turbotax.

Turbotax needs to be updated to be able to include state tax credits as income taxes paid that year that doesn't move to the state as current year tax withholding.

Ken

[DianeW777]

Perhaps. Keep in mind the tax return, both state and federal, need accuracy. There are situations where it's necessary to make entries that provide the correct results due to the many differences between various state returns and the federal return. 

You can confidently make the changes provided by our tax expert @AmyC.

[ken_311]

I don't believe the right answer is to make entries that provide the correct results in this case.  This is a federal return issue, not a specific state return issue.  The IRS has provided guidance on how to deduct charitable contributions that are also state tax credits in the instructions for Schedule A.  There is a safe harbor that you can qualify for allows you to apply the state tax credit as state taxes paid in the year the credit is applied.  This is independent on your state of residence.

It is too late for this year so the workaround that AmyC suggested is all that can be done for 2025 taxes.  For future years I recommend Turbotax is updated to allow the user to apply this safe harbor rule when entering itemized deduction data in Turbotax.