Proposition 208, on the ballot in the 2020 general election, would add a new surcharge to Arizona income taxes that is set to take effect for tax years beginning from and after December 31, 2020—or, for most taxpayers, calendar year 2021 individual tax returns.[1]
As of the early morning following the election, the Proposition held a 135,856 vote lead with the Arizona Republic website showing 85.02% reporting (presumably election day votes in addition to the majority of the early voting ballots). While not an insurmountable lead, it is very possible that Proposition 208 will pass and thus clients will be calling about its impact.
So I’ve decided to take the risk and detail how the provision would work, assuming it actually does pass and become law. If that doesn’t happen, treat this as an analysis of a proposed law that never became law–but right now it looks like it will pass (we’ll see if we know more by later in the week).
The details of the provision are outlined below.
New ARS §43-1013.A.1 and 2 provide for the new tax. The tax applies at a rate of 3.5% on taxable income in excess of
- $250,000 for single individuals or those filing married filing separately[2] or
- $500,000 for those filing as head of household or a married couple filing a joint return.[3]
The new section reads as follows:
43-1013. Income tax surcharge for public education
A. In addition to any other tax imposed by this chapter, for taxable years beginning from and after December 31, 2020, there shall be levied, collected and paid an income tax surcharge to advance public education in this state as follows:
1. In the case of a single person or a married person filing separately, a surcharge at the rate of three and one-half percent of taxable income in excess of $250,000.
2. In the case of a married couple filing a joint return or a single person who is a head of household, a surcharge at the rate of three and one-half percent of taxable income in excess of $500,000.
B. Notwithstanding sections 42-1116 and 43-206, the department shall separately account for revenues collected pursuant to the income tax surcharge imposed by this section, and shall deposit those revenues in the student support and safety fund established by section 15-1281.
C. The income tax surcharge levied by this section must be collected regardless of whether the income tax rate brackets in this chapter are changed, replaced or eliminated by an act of the legislature.[4]
EXAMPLE 1, MARRIED COUPLE FILING JOINT RETURN, BELOW EXEMPTION LEVEL
Wayne and Susan are a married couple filing a joint return. Their Arizona taxable income for 2021 is $450,000. Since their taxable income is less than $500,000 (the surtax level found at ARS §43-1013.A.2 for the married filing joint status), they will not face an addition to their Arizona income tax for 2021 under ARS §43-1013.
EXAMPLE 2, SINGLE INDIVIDUAL
Wilma, an unmarried individual who has a filing status of single, has Arizona taxable income of $600,000 for 2021. In addition to the regular Arizona income tax due on Wilma’s 2021 Arizona income tax return, Wilma will owe an additional surcharge under ARS §43-1013 of $12,250 (3.5% of ($600,000 – $250,000)).
EXAMPLE 3, HEAD OF HOUSEHOLD
Assume the same facts as in Example 2, except that Wilma qualifies to file as head of household. In that case, Wilma’s additional tax under ARS §43-1013 will be $3,500 (3.5% of ($600,000 – $500,000)).
EXAMPLE 4, MARRIAGE CREATING A TAX REDUCTION UNDER ARS §43-1013
Robert and Cynthia are considering getting married before the end of 2021. Robert’s Arizona taxable income if he remains unmarried at year end and files as a single individual will be $400,000, while Cynthia’s Arizona taxable income as a single individual will be $75,000. If they are married before year end their joint Arizona taxable income will be $475,000 (note, this would not have to be the case, but we will assume that for purposes of this illustration). If they are married they plan to file a joint return.
If they do not marry before the end of 2021, Robert will face a §43-1013 surcharge of $5,250 while Cynthia will not have any surcharge applied to her return.
If the couple does marry before year end, there will be no surcharge on their joint return as their taxable income will be below the surcharge level. Thus, in this case a marriage would reduce their combined surcharge.
EXAMPE 5, MARRIAGE CREATING A TAX INCREASE UNDER ARS §43-1013
The impact of marriage is a bit different in certain cases where one or both of the individuals considering marriage qualify for head of household filing status.
If we assume that Robert has a dependent that would qualify him for head of household filing status, and that Cynthia’s Arizona taxable income is $250,000 the results are a bit different. We will again assume that the couple’s joint Arizona taxable income would the total of their individual filing status taxable incomes, or $725,000 in this case.
If they do not marry before the end of 2021 there will be no §43-1013 surcharge imposed on either tax return. Robert’s taxable income of $475,000 is below the $500,000 level at which the surcharge begins to be imposed on head of household filing status taxpayers, while Cynthia’s taxable income is at the maximum level she could have as a single individual without triggering the tax.
But if the couple marries, they now will see their combined income tested against a single $500,000 Arizona taxable income level before they begin to pay a surcharge—that is, exactly the same amount as Robert was granted when filing head of household status. The joint return would see a §43-1013 tax imposed on $225,000 ($725,000 – $500,000), for a surcharge of $7,875 (3.5% of $225,000).
Special rules apply to the Department of Revenue’s rulemaking for this provision, found in Section 7 of the Proposition:
Section 7. Exemption from rulemaking
For the purposes of adopting rules to implement this act, and for twenty-four months after the effective date of this act, the department of education, the state board of education and the department of revenue are exempt from both of the following:
1. Any executive order or other directive purporting to limit or restrict the ability of the department of education, the state board of education and the department of revenue to adopt new rules.
2. The rulemaking requirements of title 41, chapters 6 and 6.1, Arizona Revised Statutes, except that each department shall provide the public with a reasonable opportunity to comment on proposed rules and shall publish otherwise-exempted rules.[5]
[1] ARS §43-1013, Added by Proposition 208, 2020 General Election, November 3, 2020
[2] ARS §43-1013.A.2
[3] ARS §43-1013.A.3
[4] Proposition 208, 2020 General Election, Section 5, November 3, 2020
[5] Proposition 208, 2020 General Election, Section 7, November 3, 2020
Ed Zollars CPA's Blog 