Arizona Subtractions from Income
Arizona offers the following deductions from Federal taxable income. If any subtractions apply to you, only enter the applicable subtractions to the extent they are included in your taxable Federal income. You cannot take a subtraction without such authority. You may not subtract any amount that is allocable to income excluded from your Arizona taxable income.
Interest on U.S. Obligations - Enter the amount of interest income from U.S. Government obligations included as income on your federal return. U.S. Government obligations include obligations such as savings bonds and treasury bills. You cannot deduct any interest or other related expenses incurred to purchase or carry the obligations. If such expenses are included in your Arizona gross income, you must reduce the subtraction by such expenses. If you are itemizing deductions on your Arizona return, you must exclude such expenses from the amount deducted.
Note: Do not subtract interest earned on FNMA or GNMA bonds since this interest is taxable by Arizona. For details, see the department's Income Tax Ruling, ITR 06-1. Do not subtract any amount received from a qualified pension plan that invests in U.S. Government obligations. Do not subtract any amount received from an IRA that invests in U.S.Government obligations. These amounts are not interest income.
Exclusion for U.S. Government, Arizona State or Local Government Pensions - If you receive pension income from any of the sources listed below, subtract the amount you received or $2,500, whichever is less. Include only the amount you reported as income on your federal return. If both you and your spouse receive such pension income, each spouse may subtract the amount received or $2,500, whichever is less.
Public pensions from the following sources qualify for this subtraction:
- The United States Government Service Retirement and Disability Fund
- The United States Foreign Service Retirement and Disability System
- Retired or retainer pay of the uniformed services of the United States
- Any other retirement system or plan established by federal law
Note: This applies only to those retirement plans authorized and enacted into the U.S. Code. This does not apply to a retirement plan that is only regulated by federal law (i.e., plans which must meet certain federal criteria to be qualified plans).
- The Arizona State Retirement System
- The Arizona State Retirement Plan
- The Corrections Officer Retirement Plan
- The Public Safety Personnel Retirement System
- The Elected Officials' Retirement Plan
- A retirement plan established for employees of a county, city or town in Arizona
- An optional retirement program established by the Arizona Board of Regents under Arizona Revised Statutes
- An optional retirement program established by an Arizona community college district
Note: Public retirement pensions from states other than Arizona do not qualify for this subtraction
Arizona Lottery Winnings - You may subtract up to $5,000 of winnings received in 2014 for Arizona lottery prizes. If you subtract Arizona lottery winnings here, you may have to adjust the amount of gambling losses claimed as an itemized deduction. See instructions for Form 140 Schedule A, itemized deductions.
U.S. Social Security Benefits or Railroad Retirement Benefits - Arizona does not tax social security benefits received under Title II of the Social Security Act. Arizona also does not tax railroad retirement benefits received from the Railroad Retirement Board under the Railroad Retirement Act. If you included such social security or railroad retirement benefits as income on your federal return, subtract this income within your Arizona state return.
- Note: Enter only the taxable amount (the amount that was subject to federal tax). Do not include any amount that was not subject to federal income tax.
Recalculated Arizona Depreciation - Enter the total amount of depreciation allowable pursuant to IRC § 167(a) for the taxable year calculated as if you had elected not to claim bonus depreciation for eligible properties for federal purposes.
Certain Wages of American Indians - Enrolled members of American Indian tribes may subtract wages earned while living and working on their tribe's reservation. The federal government must recognize these tribes.
Income Tax Refund From Other States - You may subtract income tax refunds received from other states if both of the following apply:
- You reported the refund as income on your federal return.
- You did not deduct the taxes paid to the other state as an itemized deduction on a prior year Arizona return.
Deposits and Employer Contributions Into MSAs
- Deposits Made Into Your MSA - If you have a medical savings account (MSA), you may be able to subtract deposits made into that MSA if all of the following apply:Employer Contributions Made to Employee MSAs - If you are an employer, you may subtract the amount contributed to your employees' MSAs that are established under Arizona law. You can subtract these contributions only to the extent not deductible for federal income tax purposes.
- You have an MSA that qualifies as an MSA under Arizona law, but not federal law.
- Either you or your employer made deposits into that MSA during the tax year.
- You had to include the deposits in income on your federal income tax return. Enter the amount of the MSA deposits that you had to include in your federal adjusted gross income.
Adjustment for I.R.C. 179 Expense not Allowed - If you made an addition for IRC § 179 expense on your 2011 and/or 2012 return, enter 20% of the amount added for 2011 and/or 2012.
Compensation Received for Active Service as a Member of the Reserves, National Guard or the U.S. Armed Forces - Members of the U.S. armed forces may subtract compensation received for active duty military service. Enter the amount of that income included in your federal adjusted gross income within the corresponding entry field in your Arizona state return (Subtractions from Income). Members of the reserves or the National Guard may subtract pay received for active service as a reservist or as a National Guard member. This includes pay received for weekend or two-week training periods. Compensation received by a “military technician (dual status)” for federal civil service employment for the National Guard or for the United States Reserves, is not income received for active service as a National Guard member or a Reserve member even though they may be required to wear a military uniform while at work.
- Note- You may not subtract pay received for active duty service as a member of the U.S. Public Health Service or NOAA.
Net Operating Loss Adjustment - Note: This subtraction applies to only those individuals who made an election under the special federal net operatings loss rules for 2008 and 2009. Under the special rules for 2008 and 2009, you could have elected to carry the net operating loss back for 3, 4 or 5 years, instead of the normal 2 years. This election would have been allowed under I.R.C. § 172(b)(1)(H) as amended by the American Recovery and Reinvestment Act of 2009 or the Worker, Homeownership, and Business Assistance Act of 2009.
Arizona did not adopt the special federal net operating loss rules for losses incurred during 2008 or 2009. For Arizona purposes, you must deduct a net operating loss as if the loss was computed under I.R.C. § 172 in effect prior to the enactment of those special rules. If you made an election to deduct your 2008 or 2009 federal net operating loss under I.R.C. § 172(b)(1)(H), you may have to enter an amount here. Figure how much of the net operating loss carry forward would have been allowed as a deduction on your 2015 federal income tax return, if the election described in I.R.C. § 172(b)(1)(H) had not been made in the year of the loss.
Contributions to 529 College Savings Plans - You may subtract amounts you contribute to 529 college savings plans during the taxable year. You may subtract the amount you contributed during the year up to a total of $2,000 ($4,000 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 subtraction taken by both of you cannot be more than $4,000. If you contribute more than $2,000 ($4,000 if married) during the year, your total subtraction is still limited to $2,000 ($4,000 if married).
Partnership Income - 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.
Other Subtractions from Income
- Fiduciary Adjustment
- Federally Taxable Arizona Municipal Interest as Evidenced by Bonds
- Adoption Expenses
- Qualified Wood Stove, Wood Fireplace, or Gas Fired Fireplace
- Claim of Right Adjustment for Amounts Repaid in Prior Taxable Years
- Certain Expenses Not Allowed for Federal Purposes
- Qualified State Tuition Program Distributions
- Subtraction for World War II Victims
- Installment Sale Income from Another State Taxed by the Other State in a Prior Taxable Year
- Agricultural Crops Given to Arizona Charities
- Basis Adjustment for Property Sold or Otherwise Disposed of During the Taxable Year
- Previously Deferred Discharge of Indebtedness (DOI) Income Adjustment
- Original Issue Discount (OID) on Reacquisition of Business Debt Instrument
- Sole Proprietorship Income of an Arizona Nonprofit Medical Marijuana Dispensary included in Federal Adjusted Gross Income
- Long-Term Care Insurance Premiums
- Long-Term Health Care Savings Accounts
For more detailed information on these other subtractions, please click here for our knowledge base article.