Arizona Other Subtractions From Income
Previously Reported Gain on Decedent's Installment Sale
Prior Arizona law required acceleration of any unrecognized installment sale gain upon the death of a taxpayer. However, this acceleration could have been avoided by the posting of a bond. If acceleration was required, your federal adjusted gross income may include installment sale amounts already recognized on a decedent's final Arizona return. If your federal adjusted gross income includes such amounts, you may subtract that portion of the gain included on your federal return.
A fiduciary uses Form 141-AZ, Schedule K-1 to report to you, your share of the fiduciary adjustment from the trust or estate. Line 3 of Form 141-AZ, Schedule K-1 shows your share of the fiduciary adjustment from the estate or trust. If the amount reported on line 3 of your Arizona Form 141-AZ, Schedule K-1, is a negative number, enter that amount as a subtraction. Note: If the amount reported on line 3 of your Arizona Form 141-AZ, Schedule K-1, is a positive number, enter that amount as an addition in "Other Additions to Income" within your Arizona state return.
Use this adjustment if your Arizona Form 165, Schedule K-1, shows a difference between federal and state distributable income. If the difference reported on your Arizona Form 165, Schedule K-1, is a negative number, enter that difference as a subtraction. Note: If the difference reported on your Arizona Form 165, Schedule K-1, is a positive number, enter that difference as an addition in "Other Additions to Income" within your Arizona state return.
Federally Taxable Arizona Municipal Interest
Enter the amount of any interest income received on obligations of the State of Arizona, or any political subdivisions of Arizona, that is included in your Arizona gross income. Do not enter any Arizona municipal interest that is exempt from federal taxation and not included in your federal adjusted gross income.
You may take this Adoption Expenses subtraction only in the year the final adoption order is granted. Enter the lesser of the total of the following adoption expenses or $3,000. When figuring your subtraction, you may include expenses incurred in prior years. The following expenses are qualified adoption expenses.
- Nonreimbursed medical and hospital costs
- Adoption counseling
- Legal and agency fees
- Other nonrecurring costs of adoption
If filing separately, you may take the entire subtraction, or you may divide the subtraction with your spouse. However, the total subtraction taken by both you and your spouse cannot exceed $3,000.
Qualified Wood Stove, Wood Fireplace, or Gas Fired Fireplace
Arizona law provides a subtraction for converting an existing fireplace to one of the following:
- Qualified Wood Stove,
- Qualified Wood Fireplace, or
- Gas Fired Fireplace and non-optional equipment directly related to its operation.
You may subtract up to $500 of the costs incurred for converting an existing fireplace on your property located in Arizona. When you figure your subtraction, do not include taxes, interest, or other finance charges.
- A Qualified Wood Stove or a Qualified Wood Fireplace is a residential wood heater that was manufactured on or after July 1, 1990, or sold at retail on or after July 1, 1992. The residential wood heater must also meet the U.S. Environmental Protection Agency's July 1990 particulate emissions standards.
- A Qualified Gas Fired Fireplace is any device that burns natural or liquefied petroleum gas as its fuel through a burner system that is permanently installed in the fireplace. The conversion of an existing wood burning fireplace to noncombustible gas logs that are permanently installed in the fireplace also qualifies as a gas fired fireplace.
Claim of Right Adjustment for Amounts Repaid in Prior Taxable Years
You must make an entry within your Arizona state return if all of the following apply:
- During a year prior to 2012 you were required to repay amounts held under a claim of right.
- You computed your tax for that prior year under Arizona's claim of right provisions.
- A net operating loss or capital loss was established due to the repayment made in the prior year.
- You are entitled to take that net operating loss or capital loss carryover into account when computing your 2012 Arizona taxable income.
- The amount of the loss carryover allowed to be taken into account for Arizona purposes is more than the amount included in your federal income.
Report the amount by which the loss carryover allowed for the taxable year under Arizona law is more than the amount included in your federal adjusted gross income.
Certain Expenses Not Allowed for Federal Purposes
You may subtract some expenses that you cannot deduct on your federal return when you claim certain federal tax credits. These federal tax credits are:
- The federal work opportunity credit
- The empowerment zone employment credit
- The credit for employer-paid social security taxes on employee cash tips
- The Indian employment credit
If you received any of the above federal tax credits for 2013, enter the portion of wages or salaries you paid or incurred during the taxable year equal to the amount of those federal tax credits you received.
Qualified State Tuition Program Distributions
If you are a beneficiary of a qualified state tuition program, you may subtract some of the amount distributed from the program for qualified education expenses. Enter the amount of the distribution that you had to include in your federal adjusted gross income. A qualified state tuition program is a program that meets the requirements of I.R.C. § 529.
Subtraction for World War II Victims
You may subtract distributions made to you for your persecution or the persecution of your ancestors by Nazi Germany or any other Axis regime for racial, religious or political reasons. If you are the first recipient of such distributions, enter the amount of the distributions that you had to include in your federal adjusted gross income.
You may also subtract items of income that are attributable to, derived from, or related to assets that were stolen, hidden from, or lost to you if you were persecuted by Nazi Germany or any other Axis regime for racial, religious or political reasons before, during or immediately after World War II. If you are the first recipient of such income, enter the amount of income that you had to include in your federal adjusted gross income.
Installment Sale Income From Another State Taxed by the Other State in a Prior Taxable Year
You may subtract income from an installment sale if both of the following apply:
- The income from the sale is subject to Arizona income tax in the current tax year; and
- You paid income tax to another state on that income in a prior tax year.
Report the amount of such income that you included in your Arizona gross income for the current tax year. Do not enter any amount that is subject to tax by both Arizona and another state in the current tax year. In this case, you may be eligible for a tax credit.
Agricultural Crops Given to Arizona Charities
Arizona law allows a subtraction for qualified crop gifts made during 2013 to one or more charitable organizations. To take this subtraction;
- You must be engaged in the business of farming or processing agricultural crops.
- The crop must be grown in Arizona.
- You made your gift to a charitable organization located in Arizona that is exempt from Arizona income tax.
Beginning with 2013, the subtraction is the larger of the wholesale market price or the most recent sale price for the contributed crop. The amount of the subtraction cannot include any amount deducted pursuant to IRC 170 with respect to crop contribution that exceeds the cost of producing the contributed crop.
Basis Adjustment for Property Sold or Otherwise Disposed of During the Taxable Year
With respect to property that is sold or otherwise disposed of during the taxable year by a taxpayer who has complied with the requirement to add back all depreciation with respect to that property on tax returns for all taxable years beginning from and after December 31, 1999, enter the amount of depreciation that has been allowed pursuant to I.R.C. § 167(a) to the extent that the amount has not already reduced Arizona taxable income in the current or prior years. Note: The practical effect of this is to allow a subtraction for the difference in basis for any asset for which bonus depreciation has been claimed on the federal return.
Contributions to 529 College Savings Plans
You may subtract the amount you contributed during the year up to a total of $750 ($1,500 for a married couple filing a joint return). If you are married filing separate returns, either you or your spouse may take the subtraction, or you may divide it between you, but the total taken by both of you cannot be more than $1,500.
If you contribute more than $750 ($1,500 if married) during the year, your total subtraction is still limited to $750 ($1,500 if you are married). For example, Jorge and Kate are married and have two children. During 2013, Jorge and Kate, contributed $1,500 to a 529 plan for Child 1 and $1,500 to a 529 plan for Child 2. Even though Jorge and Kate contributed a total of $3,000 during 2013, they may subtract only $1,500 on their 2012 return.
You may take a subtraction for a contribution that you made during 2013, to a plan that existed before 2013. You may take a subtraction for a contribution that you made during 2013, to a plan established in another state. You may take a subtraction for a contribution that you made in 2013, to any 529 college savings plan. This could be a plan established for a child, grandchild, niece, nephew, or any other person for whom a plan has been established. Note: You cannot take a subtraction for an amount transferred from one college savings plan to a different college savings plan (a rollover).
Previously Deferred Discharge of Indebtedness (DOI) Income Adjustment
Generally, when a loan is settled for less than the amount owed, DOI income is realized by the debtor and usually must be included in the debtor’s gross income. The amount of DOI income is generally equal to the amount of loan forgiveness. DOI income also occurs when a debtor repurchases his or her own debt at a discount (a price lower than the adjusted basis issue price of the debt instrument). In debt repurchase transactions, the amount of DOI income is generally equal to the difference between the adjusted issue price and the price paid for the debt instrument.
For federal purposes, a taxpayer may have made a special election for taxable years 2009 or 2010 to include DOI income in connection with the reacquisition of a business debt instrument, ratably over a 5 year period. A taxpayer that made this election will generally include this income in federal adjusted gross income beginning with the 2014 taxable year. A taxpayer would have made the federal election under I.R.C. § 108(i) as added by the American Recovery and Reinvestment Act of 2009.
Arizona did not adopt the special federal DOI income deferral provisions for the 2009 or 2010 taxable year. For Arizona purposes, if you made the federal election to defer the inclusion of DOI income under I.R.C. § 108(i), you were required to add the amount of deferred DOI income to Arizona income for the year for which you made the election. (See the instructions for “Other Additions to Income.”) If you made the required addition to Arizona income on the Arizona return filed for the year in which you reacquired the debt instrument (2009 or 2010), Arizona will not tax that DOI income twice. In the year in which you include that deferred DOI income in you federal adjusted gross income, you may take a subtraction for the amount included for that year. Usually this subtraction will apply to taxable years 2014 through 2018. However, if you had to accelerate the deferral for federal purposes, this subtraction may apply to a taxable year prior to 2014. Within your Arizona Resident return, enter the amount of previously deferred DOI income that you included in your federal adjusted gross income for the current taxable year to the extent that the amount was previously added to your Arizona income.
Original Issue Discount (OID) on Reacquisition of Deb Instrument
For federal purposes, when a taxpayer made the special election to defer DOI income under I.R.C. § 108(i) (see letter “P” above), the taxpayer was not allowed to take a deduction with respect to the portion of any OID that accrued with respect to that DOI income, during the income deferral period. In this case, the taxpayer must deduct the aggregate amount of the OID deductions disallowed ratably over a 5 year period, beginning with the period in which the income is includible in federal adjusted gross income.
Arizona did not adopt the federal provisions requiring a taxpayer to defer the OID deduction in cases where the taxpayer federally deferred the DOI income under I.R.C. §108(i). For Arizona purposes, you were required to add the amount of deferred DOI income to Arizona income on the return filed for the year in which you reacquired the debt instrument. Since Arizona is taxing the federally deferred DOI income for 2009 or 2010 on your 2009 or 2010 Arizona return, you may subtract the amount of OID that accrued during the taxable year with respect to that DOI income. Within your Arizona Resident return, enter the amount of any OID that was deferred and not allowed to be deducted in computing your federal adjusted gross income for 2012 under I.R.C. § 108(i).
Other special adjustments may be necessary:
- You are a qualified defense contractor that elected to amortize under Arizona Revised Statutes section 43-1024.
- You sold or disposed of property that was held for the production of income and your basis was computed under the Arizona Income Tax Act of 1954.
- You were an Arizona resident before December 31, 1975, and you are receiving IRA distributions from your IRA account to which you made contributions before December 31, 1975.
- You were an Arizona resident before December 31, 1975, and you are receiving distributions from your qualified self-employment retirement plan to which you made contributions before December 31, 1975.
- You deferred exploration expenses determined under Internal Revenue Code section 617 in a taxable year ending before January 1, 1990, and you have not previously taken a subtraction for those expenses.