New tax forms being prepared to get state more money
PHOENIX — State revenue officials are preparing new individual income tax forms with changes in law demanded by Gov. Doug Ducey that will take an additional $170 million or more out of the pockets of Arizonans even though the Legislature has yet to consider them.
In an announcement Thursday, the Department of Revenue acknowledges the forms and instructions it is crafting are based on the presumption that lawmakers eventually will agree to the governor’s call to “conform” Arizona tax laws to changes made by Congress in the Internal Revenue Code. The goal is to ensure that state tax forms will be available both online and in paper by Jan. 28, the first day that federal tax forms can be filed.
But that presumes that lawmakers actually vote to give Ducey what he wants. And that could prove to be an uphill fight for the governor given the price tag.
Conformity is designed to make the filing of state tax forms easier, as Arizona residents can use the same definitions and figure from the federal tax forms for income and deductions. In prior years those conformity bills have gone through without much debate.
But House Speaker J.D. Mesnard said this isn’t some simple tweak this year.
He cited figures from legislative and revenue staffers that show conforming this year would mean a big boost in what some state residents owe. And Mesnard, who is moving to the Senate and will chair the Finance Committee when the session begins Monday, Jan. 14, said he will fight Ducey’s plan — the one the Department of Revenue is using to craft tax forms — as an unfair “windfall” for the state at the expense of Arizona taxpayers.
What that means is that those who use these new forms do so at their own risk. If lawmakers reject Ducey’s plan, they could end up having to file amended returns.
In fact, Mesnard is suggesting the best course of action for Arizona taxpayers is to wait to see what legislators finally approve. And that could mean seeking an automatic extension from the April 15 filing date if there is no final decision.
But gubernatorial press aide Patrick Ptak said that having the Department of Revenue print up forms now, with tax law changes that lawmakers may never approve is actually in the best interest of residents. He said it allows them to file their state returns at the same time as the federal returns — even if those forms are based on tax-law provisions that are never adopted and taxpayers then have to file amended returns later on.
Arizona tax law generally mirrors the federal tax code. So those items that can be subtracted from income on the federal tax form, like unreimbursed moving expenses, also do not count as state income.
More significant are the deductions for things like charitable contributions, taxes paid and interest on home mortgages.
In late 2017, President Trump signed the Tax Cuts and Jobs Act, which is the largest revision to the Internal Revenue Code in more than 30 years.
Those changes, including some new limits on deductions and subtractions, kicked in for the 2018 tax year. But the trade-off for individuals was a sharply higher federal standard deduction, meaning many who used to itemize now will do much better without.
The federal tax forms going out reflect those changes. And now, with Thursday’s announcement, so will the state forms.
But here’s the thing: While conforming to federal law disallows or reduces deductions, there is no commensurate increase in the state’s standard deductions. So that hikes what Arizonans will owe.
Legislative budget staffers put the additional burden on affected individuals at $173.9 million; the Department of Revenue estimates taxpayers will shell out an extra $228.4 million — all just to keep state tax laws in conformity with the federal code.
Mesnard said that’s a high price for Arizonans to pay just to keep state tax law in line with federal laws.
Aside from simplicity, however, there is no legal requirement for the state to mirror federal tax law. In fact, state lawmakers have previously decided to be more generous than Congress in what is deductible.
For example, under federal law, total medical and dental expenses must exceed 10 percent of adjusted gross income before a deduction is allowed. By contrast, Arizona allows all taxpayers who itemize to deduct 100 percent of their medical expenses.
And residents here also can subtract up to $5,000 of Arizona lottery winnings from their state tax forms.
Mesnard said it is a mistake for the Department of Revenue to print tax forms for tax laws that have not been approved — and may never be approved — by the Legislature.
The simplest option, he said, would be for the agency to hold off and give no advice to taxpayers about filing this year because the question of what they will owe “is up in the air.” But in going ahead and telling people to start filling out the tax forms based on a yet-to-be-approved assumption, Mesnard said the agency is providing “bad guidance that would require amended returns.”
“Without hesitation, I would advise all taxpayers to wait to file their taxes until we have resolution on tax conformity,” Mesnard said, regardless of whatever the Department of Revenue is putting out.
If there’s no decision by the April 15 filing deadline, that presents a different problem.
Arizona law allows all individuals to get an automatic six-month extension to file a return.
But here’s the thing: That does not provide an extension of making payments. To avoid penalties, taxpayers must pay at least 90 percent of what is due by April 15.
That, said Mesnard, could create a situation where someone seeks an extension on April 15 assuming he or she owes no taxes beyond what already has been withheld, only to find out once state lawmakers act that they actually should have written out a check on that date.