Arizona’s tax code does not yet comply with federal law. Why it matters
Every year the federal government changes the country’s tax code, the Arizona legislature must decide whether or not to adopt or comply with the changes.
Usually, lawmakers adapt state tax rules to those of the federal government, in large part to maintain a semblance of consistency. But this year, Arizona lawmakers are delaying in adopting key measures, which has made many taxpayers and professional tax preparers nervous.
Additionally, the state has yet to extend the 2020 filing deadline to May 17 to match the new temporary deadline for federal filing. This effectively means Arizona taxpayers must grapple with two sets of tax rules and two time limits.
Arizona is a “piggyback” state for electronic filing, which means federal returns must first be filed online and, when accepted, Arizona electronic returns can be submitted, a noted Kathy Coleman, a certified public accountant in Chino Valley. But if Arizona returns continue to be due on April 15, before the temporary federal deadline, “we have a mess,” she said in an email.
Other states that impose income taxes also face the same dilemma, but most of them have already complied with the recent round of federal tax changes. Most also adopted the May 17 filing extension. (A move by State Representative Shawnna Bolick, R-Phoenix, to extend Arizona’s deadline to May 17 was passed by a legislative committee.)
The unemployment benefits dilemma
The main problem this time around is that Congress has made several notable changes to the tax rules in an attempt to mitigate the financial fallout from the COVID-19 pandemic. A big one, involving unemployment benefits, was made earlier this year, retroactively affecting 2020 returns.
Normally, unemployment benefits are taxable, but Congress has ruled that, for 2020, households earning less than $ 150,000 do not have to pay tax on the first $ 10,200 of jobless benefits.
“The angst is particularly acute this year because of the number of provisions and the number of tax returns involved,” said Monica Stern, a CPA in Phoenix. “If we don’t have compliance, it creates a headache for all of us.”
In 2020, more than 446,000 Arizonans claimed regular unemployment benefits, in addition to just over 1.6 million others who called for special unemployment benefits in the event of a pandemic, according to Tasya Peterson, spokesperson. of the State Department of Economic Security. The two groups are separate and overlap little, she said, meaning more than 2 million Arizonans received unemployment assistance last year out of a population of around 7.5 million. inhabitants (and a working-age population of around 4.5 million).
Most of these beneficiaries fall below the household income limit of $ 150,000, which means that at least part of their earnings would be tax-exempt and therefore affected by any Arizona adjustment.
Retirement withdrawals, tax-free loans
Various other provisions have also been changed at the federal level, including making Paycheck Protection Program loans forgivable, meaning tax-exempt, while allowing the relevant deductions, said Ed Zollars, a Phoenix CPA who closely follows legislative changes. Loans granted are generally taxable. More than 81,000 Arizona companies have received funding under the program, according to the Zippia career website.
As another example, Stern cited the possibility of spreading withdrawals from retirement accounts over three tax years, which could ease the tax burden, with the ability to return withdrawals to a retirement account to delay taxes. The retirement income is normally taxable in the year taken.
But the big change concerns the unemployment benefits paid in early March as part of the US rescue plan, because they affect so many Arizonans.
“If you are married, each spouse receiving unemployment benefit does not have to pay unemployment benefit tax up to $ 10,200,” the IRS said in an update. “Amounts over $ 10,200 for each individual are still taxable. If your modified gross income (adjusted gross income) is $ 150,000 or more, you cannot exclude any unemployment benefit. “
The Arizona legislature generally complies with federal tax changes, but that’s not a certainty, especially if it means the state would have to forgo millions of dollars in tax revenue, as would be the case with the single available without a job, Zollars said.
In addition, there is no deadline for compliance, with the Legislature sometimes extending the process by about a year, as happened with the imposition of unemployment in 2009, he said. .
“There is no guarantee that they will tackle unemployment this session,” he said, adding yet another possibility – the state could adopt or comply on some subjects but not on others. .
It might not be the worst. The decision not to comply in 2009 “gave rise to many notices, much later, to taxpayers that they owed additional taxes,” said Coleman.
Other uncertain details
It is also unclear whether the State Department of Revenue should release new instructions and forms for the current tax year and how and when tax software vendors might update their products.
“Shouldn’t the Revenue Department be issuing new instructions on how to complete state forms since the ‘Federal Adjusted Gross Income’ starting number will not include state taxable unemployment?” Phoenix tax attorney Bob Kamman asked in an email.
(Incidentally, he said married couples near the $ 150,000 level who received jobless benefits in 2020 might want to consider filing separately to maximize their benefits.)
In a response to this article, the department said the declarations and instructions for 2020 were drafted assuming compliance and, assuming the legislature is in full compliance, “no changes will be required to the form or the instructions of Arizona “.
But if Arizona doesn’t fully comply, “some taxpayers may need to change their Arizona return to make the adjustments.”
If taxpayers follow the instructions and later have to make changes due to the state’s non-compliance, “they will have until the extended due date of the following year’s return” to do so without have to pay penalty or interest.
Making accurate estimated quarterly payments can also be a problem if taxpayers aren’t sure how much they’ll owe, Stern added.
Some taxpayers and preparers choose to file Arizona returns without delay, taking into account the April 15 deadline. Others choose to wait for the dust to settle, although that can also cause problems.
“We have a lot of people in our office alone who are badly needed for refunds, for whom we cannot yet file their tax returns,” said Coleman.
The IRS promises to provide advice to taxpayers who have received unemployment compensation and have already filed their returns. The agency wants to avoid a scenario where millions of people file amended returns. Taxpayers “should not file an amended return at this time,” the IRS said.
Obviously, there is still a long way to go. “Arizona taxpayers still have a lot of unknowns for filing the 2020 returns,” Coleman said.
Contact the reporter at [email protected].
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