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