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Arizona Finally Conforms to U.S. Tax Reform

Arizona enacted a new law on May 31, 2019, conforming its state taxes to the federal Tax Cuts and Jobs Act (TCJA) as of 2018, and making a number of other changes to reduce the income tax burden on Arizona taxpayers. Among federal changes adopted is suspension of the moving expense deduction/exclusion through 2025.

Arizona becomes the 16th so-called “static” conformity state (which must explicitly act to conform to federal tax changes) to enact conformity legislation.  Only Arkansas, California, Massachusetts, and Minnesota have not yet acted.

The new Arizona law lowers the income tax rates for each tax bracket and increases the state standard deduction to match the new, higher federal standard deduction.  It also creates a new dependent tax credit and provides taxpayers who do not itemize deductions with a charitable deduction equal to 25% of their charitable donations in addition to the standard deduction.

Notably, however, the changes to the tax rates and the other tax cuts do not apply to 2018.  For 2018, Arizona tax forms assumed full conformity, and Arizona will keep the tax windfall this provided. 

This will also mean that moving expense payments and reimbursements were not excludable in Arizona for 2018.  Because Arizona had not acted as of the time Forms W-2 for 2018 were due in 2019, many employers concluded that such payments remained excludable.  This is not the case, and it is unclear what (if anything) companies who treated such payments as excludable should do.  However, it is clear that any payments or reimbursements for moving expenses will be taxable in Arizona in 2019.

How This Impacts Mobility

Worldwide ERC® members will need to begin treating moving expense payments and reimbursements as taxable in Arizona, and apply gross-up policy to those payments for 2019.  However, state tax gross-ups will be reduced to some extent by the tax reductions included in the new Arizona tax law.

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