Governor Katie Hobbs issued Executive Order 2025-15 on November 20, 2025, titled “Cutting Taxes for Hard-Working Arizonans”. This action initiates a series of prospective changes to the Arizona state income tax structure, primarily aimed at middle-class taxpayers. Given that the Executive Order (EO) directs the Arizona Department of Revenue (ADOR) to update state tax forms for the 2025 tax year, tax professionals must understand the technical directives of the order and the subsequent legislative action required to ensure the validity of these planned benefits.
Executive Order 2025-15: Directives and Scope
The core function of Executive Order 2025-15 is to mandate that ADOR update the State of Arizona tax forms to enable taxpayers to utilize the proposed Middle Class Tax Cuts Package when filing their 2025 tax returns.
The EO directs ADOR to implement two distinct categories of adjustments:
- Standard Deduction Update: The tax forms will be updated to include the higher standard deduction passed into law by H.R. 1. This brings Arizona tax forms into conformity with portions of H.R. 1 that benefit middle-class Arizonans. Specifically, the state standard deduction is set to increase from the previous $15,000 amount to $15,750 for single filers and $31,500 for joint filers.
- Prospective Instructions for Legislative Subtractions: The ADOR is also directed to include prospective instructions for Arizonans to take advantage of several new deductions. These instructions are included in anticipation of the legislature subsequently codifying these proposed measures into law.
It is important to note that any further tax conformity provisions, particularly those affecting corporations and high earners, are intended to be negotiated separately in the FY27 budget, consistent with the standard procedure for legislation that carries fiscal impacts.
Specific Proposed Subtractions and Deductions
The Middle Class Tax Cuts Package introduces several specific income subtractions designed to reduce Arizona taxable income:
- Senior Deduction: An additional deduction of $6,000 for Arizonans over the age of 65.
- Tipped Income Subtraction: Arizonans will be allowed to deduct tipped income from their state taxes. For instance, a hypothetical taxpayer’s return showed a $5,000 subtraction for tip income.
- Overtime Income Subtraction: Arizonans will be allowed to deduct eligible overtime income from their state taxes. A hypothetical example illustrated a $3,000 subtraction for overtime wages.
- Car Loan Interest Subtraction: Arizonans will be allowed to deduct interest for car loans on new, American-made vehicles from their taxes. A hypothetical taxpayer was shown benefiting from a $4,000 subtraction for car interest.
These combined subtractions and the increased standard deduction significantly impact the calculation of Arizona Taxable Income. In a modeled scenario, a 68-year-old single filer with a Federal Adjusted Gross Income (AGI) of $75,000 saw their Arizona Taxable Income drop from $60,000 (using the $15,000 standard deduction) to $41,250 (using the $15,750 standard deduction and $18,000 in additional subtractions).
Implications for Arizona 2025 Income Tax Returns
The Executive Order places ADOR in the position of issuing tax forms that incorporate subtractions that have not yet been statutorily enacted.
For tax professionals preparing 2025 returns, the primary operational challenge lies in the distinction between the standard deduction increase and the new subtractions:
- Standard Deduction: The increased standard deduction ($15,750 single / $31,500 joint) is included in the updated forms because it was “passed into law by H.R. 1”.
- Middle Class Subtractions: The deductions for tipped income, overtime, senior status, and car interest are based on “prospective instructions”. This means that while ADOR has been directed to enable these subtractions on the forms, their legal efficacy depends entirely upon the subsequent legislative action.
If the legislature fails to codify the Middle Class Tax Cuts Package, taxpayers who rely on the deductions specified in the ADOR’s prospective instructions could face deficiency assessments, as the subtractions would lack statutory authority.
The Urgency of Legislative Codification
Governor Hobbs has called upon the state legislature to immediately pass the Middle Class Tax Cuts Package at the beginning of the session. This urgency stems from the need to provide tax certainty to everyday Arizonans.
Crucially, the vast majority of taxpayers will file their 2025 returns prior to the anticipated completion of the FY27 budget. If the legislature delays the codification of the tips, overtime, senior, and car interest subtractions until the budget process concludes, those taxpayers who file early and claim these deductions, based on ADOR’s instructions, risk filing an erroneous return if the provisions are altered or rejected.
Therefore, for CPAs and EAs seeking to ensure clients maximize benefits without incurring future amendment requirements, the prompt codification of the Middle Class Tax Cuts Package into state law by the legislature is essential. Codification at the start of the session would retroactively grant the necessary statutory authority to the subtractions, aligning the law with the tax forms ADOR has been directed to issue under EO 2025-15.
The filing certainty for Arizona taxpayers regarding these proposed subtractions is currently akin to building a bridge that is authorized but not yet anchored; while the path forward is visible on the forms, its structural integrity relies entirely on the timely arrival of statutory legislative support.
Prepared with assistance from NotebookLM.
Ed Zollars CPA's Blog 