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

[TheSchulteMeistr]

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)).

[LenaH]

I was able to make the adjustment to the Arizona state income tax deduction in TurboTax Desktop. If you are using TurboTax Online, you will have to switch to the Desktop program in order to enter your information in Forms mode. Click here for more information.

To make the adjustment in TurboTax Desktop, please follow the instructions below:

1. Open your return.
2. Go to Forms mode. 
3. Navigate to the Tax Payments worksheet under Form 1040.
4. Enter the amount of safe harbor donation on Line 18d, Positive Adjustment. 
5. Go to Step-by-Step mode. 
6. Open your Arizona return.
7. Continue through the screens until you reach the screen, Adjustment to State Income Tax Deduction.
8. Enter your state income tax adjustment. 

[Edited 4/17/25 l 2:20PM PST]

@TheSchulteMeistr 

[TheSchulteMeistr]

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.

@Lena 

[TheSchulteMeistr]

@MarilynG1 
This is different thread but related to the same topic you commented on earlier. I'm pretty sure it does apply to this situation and the one from your former comment.

When you say "try using State SH in your federal entry" what exactly do you mean?
Are you saying there is place in turbo tax when entering charitable tax deductions that I can mark a safe harbor election? I couldn't find that but I'll check again. Any other guidance you could provide would be helpful.

[LenaH]

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 

[Dkingshere]

I have the same scenario.  I have been up and down the questions on the AZ step-by-step on the desktop version and do not see  that "Adjustment to State Income Tax Deduction" screen.  How do I navigate to, select or trigger that screen to appear?

[DaveF1006]

To clarify, what are you trying adjust? Please be more specific with your request so we can accurately address your concern. 

@Dkingshere 

[Dkingshere]

Following the guidance from @LenaH from 4/17/24, there are two issues.  First, after entering the amount on Federal return as a Positive Adjustment in the Federal Tax Payments Worksheet form (per step #4 above), TurboTax highlights that cell red and calls the form "Not Done".  How do you fix that?

Second, on the State return for Arizona, entering the amount in the "Adjustment to State Income Tax Deduction" screen in the Step by Step mode (per #8 above), that amount is reflected on line 2A of Form 140 Schedule A Adjustment to State Income Taxes (page 2), which then effects line 7 of the Arizona Schedule A Itemized Deductions Adjustments (page 1).  This all appears correct, however, this entry does not have an impact on line 53 of Arizona Form 140, "AZ income tax withheld", which is where that Postive Adjustment should be falling off. 

The problem is that in TurboTax, line 53 of  Arizona 140 appears to come from line 20 of Total Tax Payments from the Federal Tax Payments Worksheet (and not from line 2A or 7 from the Arizona Sch A), and isn't appropriately adjusted downwards to remove the Positive Adjustment that was made on the Fed form.  There doesn't appear to be any way to manually adjust line 53 of Arizons Form 140.  The instructions to Arizona 140 provided by AZDOR only state that State Income Tax payments from W2s and 1099s are to be entered, and is silent on entering any adjustments. 

Line 53 of Arizona Form 140 needs to be adjusted downwards.  How is this done?  TY

[DaveF1006]

It depends. If you use a "Positive Adjustment" on the Federal worksheet to show a payment that’s not reported on a W-2 or 1099, such as an extension payment or a prior-year overpayment, TurboTax may flag it as "Not Done" because it’s expecting a specific source for that amount. Here’s a suggestion to clear up the discrepancy and fix the Arizona return.

The cell is red because TurboTax’s smart check looks for a clear source when you make a manual adjustment. Here is a suggestion how to fix it. 

1. If you’re using TurboTax Desktop, switch to Forms Mode. If you’re using the online version, go to the Deductions & Credits section, then Estimates and Other Taxes Paid.
2. Instead of entering the amount directly into the worksheet, enter it under “Other Income Taxes Paid in 2025” and choose “Withholding not already entered.”
3. Entering it this way connects your data to the right schedule and clears the “Not Done” error.
4. Be sure to close your return to save any changes, then open it again to continue working on it

Arizona Line 53 pulls its amount from the Federal "Total Payments" section. If you increased the federal payment with a positive adjustment, it may be making your Arizona withholding too high.. Arizona Form 140, Line 53 should only reflect withholding. If the number is too high because of a Federal adjustment, you’ll need to lower it to match the correct withholding amount.

Arizona Form 140, Line 53 is used only for withholding. If the number is incorrect because of an adjustment pulled from your federal return, check the "State Taxes Paid" section in the Arizona interview. Look for a screen called "Income Tax Withheld" or "Taxes Paid to Arizona." TurboTax usually shows a table with all your W-2s and 1099s. If you see your "Positive Adjustment" as an extra row, remove it from the table.

Keep in mind, the entry you made on Schedule A (Step #8 in your guide) only affects your itemized deductions. It won’t fix a credit or payment issue on Line 53.

If you’re using the Desktop version, you can override Line 53 in Forms Mode by right-clicking it and choosing Override. Just know that this will prevent you from e-filing.

If the "Positive Adjustment" is‌ a tax payment that shouldn’t count as Arizona withholding—like a payment made with an extension—follow these steps.

1. Remove the "Positive Adjustment" from the Federal Tax Payments Worksheet if you are using the desktop program 
2. Go to Federal > Deductions & Credits > Estimates.
3. Enter the payment under State Estimated Taxes or 2024 (or 2025) State Extension Payment.

This puts the amount on the right line of Federal Schedule A as a deduction and marks it for Arizona as an estimated or extension payment, not withholding. The amount will move from Line 53 (Withholding) to the correct payment line on the Arizona return, usually Line 55 or 56.

[Dkingshere]

Removing the amount as a Positive Adjustment in the Fed form and instead, entering it as “Withholding not already entered” worked in terms of TTax not making the cell red anymore.  Thank you.

However, how it's treated in the AZ Form 140 is still an issue.  You mentioned; "Look for a screen called "Income Tax Withheld" or "Taxes Paid to Arizona." TurboTax usually shows a table with all your W-2s and 1099s. If you see your "Positive Adjustment" as an extra row, remove it from the table."

In the desktop version in Step by Step mode in the Arizona return, there does not seem to be a screen for "Income Tax Withheld" or "Taxes Paid to Arizona" or anything like it where State Tax Withholding items are displayed.  In the Forms mode there is the Tax Payment Worksheet, which now shows that amount as an "Other" withholding, but there's no way to just "remove it" without doing an override.  

[DaveF1006]

Yes, the summary table I was referring to is listed on Lines 9-13a on the tax payments worksheet. As far as other withholding, right-click in the box and select data source. It will usually tell you where this amount was reported. Usually it's from forms not listed in lines 9-13a like 1099 Int, 1099 DIV.

Once determined where this was reported in the interview, go back to where this was entered to remove it. 

@Dkingshere 

[jrneuville]

I'm having the same issue as @TheSchulteMeistr and @Dkingshere. I've entered the $400 for the AZ Public School Tax Credit as a positive adjustment to my total tax payments on Line 18d of the Federal Tax Payments Worksheet as instructed above by @LenaH. However, that $400 then gets pulled into Line 53 on my Arizona Form 140 and there is no way to back it out on the Arizona Tax Payments Worksheet. As both @TheSchulteMeistr and @Dkingshere have noted, this results in my Arizona tax refund being overstated by $400, because Turbotax is giving me both the $400 credit on AZ Form 140, Line 51 (pulled from AZ Form 301, Line 7, which is pulled from AZ Form 322) and an additional $400 as AZ income tax withheld on AZ Form 140, Line 53. Is there a way to correct this, or does it require an update to TurboTax?

[jpurdon]

Thank you for posting this question. This is all about as clear as mud and I'm really disappointed that TT isn't helping us to resolve this. The AZ Tax Credits aren't new; how can this still be a problem? I'm wishing I wasn't so generous!

[PatriciaV]

We would like to test this further and it would be helpful to have a TurboTax ".tax2025" file that includes the experience you describe.

If you would be willing to send us a “diagnostic” file that has your “numbers” but not your personal information, please follow these instructions: 

In TurboTax Desktop, open your return and go to Online in the TurboTax header. (On a Mac computer, choose Share or Help.)

1. Choose Send Tax File to Agent.
2. You will see a message explaining what the diagnostic copy is.  Click Send on this screen and wait for the Token number to appear.
3. Reply to this thread with a screenshot of your Token number (this avoids Community filters for numbers with a dash) and tag (@) the Expert requesting the token from you.
4. Please include any States that are part of your return - this is VERY important.

If you're using TurboTax Online, go to Tax Tools >> Tools in the left column (scroll down if necessary) to find Send Tax File to Agent.

We will then be able to see the same experience you are having. If we are able to determine the cause, we'll reply here and possibly provide you with a resolution. 

@jpurdon 

[job407]

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.