So I've posted about this last year and I've seen other similar posts last year on related matters. But TurboxTax simply does not accurately account for the SALT Safe Harbor & certain Arizona tax credits. If you follow the Turbo Tax directions and the IRS directions, TurboTax will input the incorrect information on your AZ return and that state return will probably be rejected. Let me explain.
A few years ago, Congress put a 10k limit on SALT deductions. But then some states tried to do a work-around whereby you could pay the state money and get a state tax credit + federal deduction for state taxes paid (a double dip). The IRS then put a stop to that and said you couldn't do both (a quid pro quo). But that affected individuals who had been donating to charitable groups to get various AZ state tax credits and who were still under the 10k SALT limit. That group of individuals should still be allowed to get both a federal deduction and a state tax credit when donating to an eligible AZ 501(c)(3). Here is a good comment on the problem. https://regulatorystudies.columbian.gwu.edu/sites/g/files/zaxdzs4751/files/downloads/PICs/GW%20Reg%2...
So the IRS then created a Safe Harbor for those individuals. If you contribute to a 501c3 that triggers an AZ tax credit (like the credit for Certified School Tuition Organizations) and if you are below the 10k SALT limit, you are supposed to be able to get both a federal deduction & the AZ tax credit. Here is the IRS Reg discussing the Safe Harbor: https://www.irs.gov/pub/irs-drop/n-19-12.pdf
This is how it's supposed to work. For that donation/credit, you are supposed to take it off the federal charitable contribution part and instead put it under your estimated taxes on your federal return. Both the IRS & TurboTax instruct you to do that. See the IRS regulation here (https://www.law.cornell.edu/cfr/text/26/1.164-3). See the "Learn More" Section of the TurboTax page entitle "Adjustment to State Income Tax Deduction" on the AZ tax return ("If you made a donation in exchange for a state tax credit and claimed itemize deductions on your Federal return, your Federal return charitable contribution deduction must be reduced as a result of receiving or expecting to receive this state tax credit. You may qualify for a safe harbor that allows you to treat some or all of the disallowed charitable contribution as a payment of state and local taxes. Remove any disallowed charity donation from your Federal Schedule A and enter your safe harbor amount as an estimate paid to Arizona on the Federal return. Return to this screen and enter the amount claimed as Arizona Estimate Tax Payments.")
But here is the problem. When you do that in TurboTax, Turbo Tax automatically takes that estimated taxes listed on the federal return (for the 501(c)(s) donation you made) and transfers it into your state return as though you in fact did pay estimated taxes to Arizona. This in turn messes up your state return and may cause it to get rejected.
I spent about 8 hours on the phone with the Turbotax people and there is no solution. I think the only work around is to keep the donation on the federal charitable contribution and make sure you are inputting that number (i.e. the AZ state tax credit) in the relevant field when asked for the credit in the AZ state return (on the page entitled "Adjustment to State Income Tax Deduction").
Doing it that way is not technically correct because the IRS instructs you to put that number in estimated taxes rather than list it as a charitable contribution on your federal return. But the deduction result should be the same either way, whether the number appears as estimated taxes on your federal return or as a federal charitable contribution (so long as you stay below the 10k SALT Limit once you add up your state taxes + relevant AZ credits).
The only other option is to do just your federal return efile in Turbo Tax and then do a separate return for AZ by print and mail, making sure the numbers are correct. Of course, that is a big hassle.
I welcome anyone's thoughts if there is another solution. If not, I would ask the TurboTax please correct this problem next year as it seems to be affecting numerous people in Arizona. Thank you.
