An All Too Familiar Conformity Issue for Arizona Tax Professionals

“ADOR Outlines Executive Order and 2025 Tax Year Income Tax Forms,” Arizona Department of Revenue mailing list, January 22, 2026

As we prepare for the 2025 filing season, Arizona tax professionals who may be new to the Arizona specific quirks of annual conformity find themselves in a unique procedural posture for filing tax returns. However, as those who been in practice for many years in Arizona knows, a federal bill passing during the year with significant changes that, if adopted in full by Arizona would result in a substantial reduction in revenue, generally means that the conformity answer won’t likely be settled until after the April 15, 2027 unextended filing deadline.

Arizona Department of Revenue and Tax Forms

The Arizona Department of Revenue (ADOR) has issued individual income tax forms for the 2025 Tax Year that assume conformity with federal tax changes and incorporate state-level executive directives before they are officially enacted into law. This presents a technical non-conformity issue. Arizona’s tax law typically references federal values, such as adjusted gross income or itemized deduction computations, based on federal law as it stood on January 1, 2025. However, the federal “One Big Beautiful Bill Act” was not enacted until July 4, 2026, meaning the current ADOR forms anticipate federal law that post-dates Arizona’s current statutory reference date.

The Arizona Department of Revenue (ADOR) conventionally publishes tax forms based on this simplifying assumption, a practice that may seem unconventional to tax professionals outside of Arizona. This is because the state legislature historically does not adopt tax conformity—especially in years with a significant revenue impact—until the final budget bill is passed at the end of the regular legislative session. Based on past experience, this typically occurs well after the April 15 filing deadline. Most often either the Legislature and Governor agree to conform to all federal changes or only fail to conform to a limited number of items, so this default allows returns to be filed in a timely manner while limiting the number of taxpayers that must later amend their returns.

This article outlines the technical guidance provided by ADOR regarding the filing of 2025 returns and analyzes the specific provisions introduced by Governor Hobbs’ Executive Order 2025-15. Practitioners must understand the “file now, potentially amend later” stance taken by the Department and the specific tax relief measures currently embedded in the forms.

The “Presumed Conformity” Approach

Historically, ADOR has issued forms based on the assumption that the Arizona Legislature will conform to Internal Revenue Code (IRC) changes made in the prior year. For the 2025 tax year, this practice has been codified and expanded via Executive Order (EO) 2025-15.

The Department has explicitly stated that the 2025 forms reflect a “regular process of assuming conformity” to the IRC. The primary driver for this early release is the federal enactment of Public Law No. 119-21 (“H.R. 1”) in July 2025. Because Arizona law mandates Federal Adjusted Gross Income (FAGI) as the starting point for state income tax calculations, ADOR determined that failing to update forms to align with federal changes would disrupt the filing process for practitioners and taxpayers alike.

The specific concern cited by the Executive is the standard deduction. Since tax year 2019, Arizona has conformed to the federal standard deduction. The Governor’s office noted that H.R. 1 includes a higher standard deduction for tax year 2025. Without the Executive Order directing ADOR to update the forms to match this federal amount, approximately 90% of Arizona taxpayers (those claiming the standard deduction) would face immediate non-conformity, resulting in potential confusion and administrative rework.

The “Middle Class Tax Cuts Package” (The Governor’s Position)

Beyond standard IRC conformity, the 2025 forms include specific subtractions derived directly from Governor Hobbs’ Executive Order. The EO identifies these as the “Middle Class Tax Cuts Package”.

Practitioners should note that the 2025 forms currently allow for the following five specific provisions:

Increased Standard Deduction: Matching the levels contemplated in H.R. 1,.
Subtraction for Seniors: The EO specifies this as an “additional deduction of $6,000 for Arizonans aged 65 and older”. ADOR guidance confirms this subtraction is present on the released forms.
Subtraction for Qualified Tip Income: Included as a specific line item subtraction,.
Subtraction for Qualified Overtime Compensation: Included to provide relief for hourly workers,.
Subtraction for Qualified Vehicle Loan Interest: This allows for the deduction of qualifying car loan interest,.

Incorporating these specific federal changes into the 2025 Arizona tax forms constitutes a departure from established practice. Typically, a bill solely advancing the Arizona conformity date to January 1, 2026, would not include these items in calculating Arizona taxable income.

Arizona utilizes its own distinct standard deduction, which is similar to, but not identical to, the federal standard deduction as it existed prior to the 2025 Tax Cuts and Jobs Act. Furthermore, the last four provisions listed do not impact federal Adjusted Gross Income (AGI) and are not treated as itemized deductions. Instead, they operate to reduce taxable income in a manner akin to the IRC §199A qualified business income deduction, which is never permitted for Arizona tax purposes. Their function is exclusively to be used in calculating federal taxable income pursuant to IRC §83.

It is important to recognize that while H.R. 1 reduced taxes for top earners and altered federal credits, ADOR’s forms only adopt the changes affecting FAGI and the specific relief measures directed by the Governor. Federal credits found in H.R. 1 that do not impact FAGI are not included on the Arizona forms.

Filing Guidance and Amendment Risks Given Subsequent Legislative Action

The most pressing question for CPAs is procedural: Should we hold returns until the Legislature convenes in January 2026?

ADOR’s guidance is unequivocal: No. Taxpayers should not wait to file.

However, this creates a distinct risk of bifurcation between the Executive’s forms and the Legislature’s eventual statutes. If the Legislature passes a conformity bill consistent with the forms released by ADOR, no further action will be required.

Conversely, if the Legislature does not approve these specific provisions, or passes a conformity bill that differs from the Governor’s EO (such as the provisions contemplated in SB 1106), taxpayers who utilized these subtractions may need to file amended returns.

The Legislature has passed a conformity bill that differs significantly from the Governor’s proposed Middle Class Tax Cut bill. The Governor subsequently vetoed the passed bill, and an override is highly improbable because the vote was strictly partisan. This situation arose following the issuance of the EO.

Penalty Relief Safe Harbor

Anticipating the potential need for mass amendments, ADOR has established a safe harbor for taxpayers caught between the Executive Order and Legislative action.

If a taxpayer files a 2025 return utilizing the provisions in the current forms, and those provisions are later deemed inconsistent with the final law passed by the Legislature:

ADOR will provide specific guidance on how to amend.
Taxpayers will not be subject to penalties or interest, provided the amended return is filed by October 15, 2027.

Conclusion

The release of the 2025 forms represents a strategic administrative move to prevent the “costly rework” of millions of returns regarding the standard deduction. However, by including the specific “Middle Class Tax Cuts” (senior, tip, overtime, and vehicle loan subtractions) prior to legislative approval, the Department has shifted the burden of monitoring legislative developments to the practitioner community.

We are advised to prepare 2025 returns using the forms as issued, taking advantage of the increased standard deduction and new subtractions where applicable. However, client communication letters should likely include a caveat regarding the pending legislative session and the remote possibility of a required amendment should the Legislature reject the Governor’s tax package.

Key Takeaway:

Per the Department of Revenue, tax professionals should:

File with Current Forms: Ensure all filings utilize the most up-to-date forms.
Monitor Legislation: Closely watch the 2026 Legislative Session for changes to Arizona’s conformity related to H.R. 1 and any subtraction modifications proposed by the Governor.
Utilize Safe Harbor: Rely on the October 15, 2027, safe harbor provision, which is anticipated to be necessary in the likely case where the final legislation differs from the Governor’s Middle Class Tax Cuts Proposal.

Prepared with assistance from NotebookLM.

Arizona Proposed Tax Conformity and Reform: A Technical Analysis of HB 2153 and SB 1106

The Arizona Legislature is currently moving two identical bills, HB 2153 and SB 1106, which propose substantial modifications to the Arizona Revised Statutes (A.R.S.) regarding income taxation in reaction to the enactment of the One Big Beautiful Bill Act. But despite rapid movement this week, it make take quite a while before we get a complete answer to how Arizona will deal with conformity this year.

While introduced separately, the legislature intends to merge these provisions into a single enactment. The legislation updates Arizona’s conformity date with the Internal Revenue Code (IRC), overhauls the standard deduction calculation, and introduces significant new subtractions from gross income for retirement and labor-related income. However the proposal would add a new nonconformity provision related to itemized deductions for state and local taxes.

While the bill is likely to receive approval from both the House Ways and Means Committee and the Senate Finance Committee in a rare joint committee meeting on January 14, the Arizona Capitol Times reported on January 13 that the bill faces a likely veto when it arrives at the Governor’s desk, while the publication also reported Senate President Warren Petersen stated the bill should arrive on her desk in days.

The Governor does not want to deal with conformity to provisions other than the ones she discussed in her Executive Order released in November until an agreement is reached on the budget for this session. So both the Executive Order and this bill appear to be opening proposals in what seems likely to become an extended battle over budget issues this session.

Even if the bill is vetoed, it is likely that eventually the parties will agree to some form of compromise that includes many of these details, so it is helpful to understand what is in this bill. Just don’t be surprised if we don’t get a bill passed and signed into law until well after the April 15 deadline.

Technical Analysis of the Bill

The following technical analysis details the additions, deletions, and modifications contained in the legislation.

I. Internal Revenue Code Conformity (A.R.S. §§ 42-1001, 43-105)

The legislation updates the definition of the “Internal Revenue Code” for Arizona income tax purposes.

Updated Reference Date: For taxable years beginning from and after December 31, 2025, the definition of the IRC is updated to mean the Code as in effect on January 1, 2026.
Retroactive Provisions: The bills incorporate provisions that became effective during 2025 with the specific adoption of their retroactive effective dates.
Historical Conformity: The bills strike out the specific conformity definition for the 2014–2015 period (Subsection K), effectively rolling the historical window forward.

II. Standard and Itemized Deductions (A.R.S. §§ 43-1041, 43-1042)

Perhaps the most structural change involves the decoupling of the Arizona standard deduction from fixed state-statutory dollar amounts.

A. Standard Deduction Coupling (A.R.S. § 43-1041(A))

Practitioners should note that the specific statutory amounts (e.g., $12,200 for single filers) and the accompanying inflation adjustment mechanisms have been deleted.

Instead, the Arizona standard deduction is now statutorily defined as “the amount of the federal basic standard deduction determined pursuant to section 63 of the internal revenue code for the taxpayer’s filing status”. This creates an automatic lockstep with federal inflation adjustments, removing the need for separate state-level inflation calculations previously mandated under the now-repealed Subsection H.

B. Charitable Contribution Adjustment (A.R.S. § 43-1041(H))

For taxpayers electing the standard deduction, the “charitable add-on” calculation (the additional amount allowed beyond the standard deduction) changes significantly for taxable years beginning from and after December 31, 2025:

Old Law: 25% of total charitable deductions allowed, with the percentage annually adjusted by a factor determined by the rate of inflation.
New Law: The add-back is equal to 100% of the taxpayer’s charitable contributions as defined in IRC § 170©, but it is subject to a strict statutory cap:
- $1,000 for single or married filing separately.
- $2,000 for married couples filing jointly.

C. Itemized Deduction for SALT (A.R.S. § 43-1042(D))

A new provision is added regarding the deduction for state and local taxes (SALT). In lieu of the federal itemized deduction amount allowed under IRC § 164(b)(7), an Arizona taxpayer may deduct up to $10,000 of that amount for state and local taxes. If the bill is enacted into law, Arizona is effectively keeping the “old law” (TCJA) version of the state and local tax deduction, deciding not to conform to the temporary higher deduction allowed on the federal return.

III. Subtractions from Gross Income (A.R.S. §§ 43-1022, 43-1030)

The legislation introduces several new subtractions from Arizona gross income, generally effective for taxable years beginning from and after December 31, 2024. These provisions implement two of the four deductions added to IRC §63 available regardless of whether or not a taxpayer itemizes deductions, but which do not reduce a taxpayer’s federal adjusted gross income. The law provides a substitute for one other of the deductions and quietly declines to adopt the fourth.

A. Labor and Compensation

The two federal Section 63 deductions proposed for adoption into Arizona tax law pertain to compensation.

Qualified Tips: Taxpayers may subtract the amount of qualified tips received that are deducted under IRC § 224. (ARS §43-1022(31))
Overtime Compensation: Taxpayers may subtract qualified overtime compensation deducted under IRC § 225. (ARS §43-1022(32))

B. Retirement Income (A.R.S. §§ 43-1022(36) and 43-1030)

The bills introduce a complex subtraction matrix for retirement income involving Roth IRAs and pension distributions.

Roth IRA Contributions: A subtraction is allowed for contributions to a Roth IRA (IRC § 408A) made during the taxable year, provided they were not deducted from federal AGI.
Pension/Retirement Distributions (New § 43-1030): Taxpayers aged 60 or older may subtract distributions from qualified pension or retirement accounts.
Aggregate Limits: The combined subtraction for Roth contributions and pension distributions is capped at:
- $6,000 for single/head of household/MFS.
- $12,000 for married filing joint.
Means Testing (Phase-out): The subtraction under § 43-1030 (distributions) is reduced by 6% of the amount the taxpayer’s Arizona gross income exceeds:
- $75,000 (Single/HOH/MFS).
- $150,000 (MFJ).

This appears to be in lieu of Arizona adopting the over 65 subtraction that the Governor had proposed in her Executive Order.

C. No Tax on Car Interest Deduction Not Adopted

The bill contains no text related to the no tax on car interest deduction added as part of the One Big Beautiful Bill, which serves to decouple Arizona’s taxable income computation from this federal provision.

Arizona tax law starts with federal adjusted gross income and allows itemized deductions by reference to the federal itemized deductions, which means simply updating the IRC conformity date would not bring in a provision that allows a deduction solely in the computation of taxable income as part of IRC §63, such as the deduction for qualified business income under IRC §199A.

So by its silence on the issue, the bill provides that Arizona law will not conform to the federal deduction for certain interest paid to acquire a qualified vehicle.

D. Family and Education

Dependent Care: Taxpayers may subtract child and dependent care expenses (IRC § 21) that exceed the federal credit amount received. (ARS §43-1022(34))
Adoption Costs (Post-2025): For taxable years beginning after December 31, 2025, the subtraction limit for adoption costs increases from $3,000 to:
- $5,000 (Single/HOH).
- $10,000 (MFJ).
This provision is already part of Arizona tax law, enacted in 2025’s session to take into account the expiration of a higher temporary increase in the allowable adoption expense.
529A/530A Distributions: A subtraction is added for distributions from accounts established pursuant to IRC § 530A (Trump Accounts). (ARS §43-1022(33))

IV. Credits and Other Provisions

A. Dependent Tax Credit (A.R.S. § 43-1073.01)

The bills amend the dependent tax credit amounts. For dependents under seventeen years of age, the credit increases from $100 to $125. The credit for dependents 17 and older remains $25. The phase-out thresholds remain unchanged.

B. Scholarship Granting Organizations (New Chapter 18)

The legislation adds Chapter 18, titled “Scholarship Granting Organizations”.

Federal Election: Arizona elects to participate in the federal tax credit established by IRC § 25F.
Certification: The Department of Revenue must certify SGOs that meet IRC § 25F requirements.
Effective Date: Participation and scholarship issuance under this chapter begin for taxable years from and after December 31, 2026.

V. Summary of Effective Dates

Retroactive to Tax Years Beginning After Dec 31, 2024:
- New subtractions for tips, overtime, dependent care, and retirement (Roth/Pension).
- IRC Conformity update (Jan 1, 2026 reference).
- Standard Deduction coupling to IRC § 63.
Effective for Tax Years Beginning After Dec 31, 2025:
- Charitable contribution standard deduction adjustment.
- Revised adoption cost subtraction.
- IRC § 530A (Trump Accounts) (This is the practical effective date, as federal law does not allow any funds to be deposited into a Trump account until July 4, 2026, thus no distributions are possible before that date. Technically this provision takes effect for tax years beginning after December 31, 2024 but it simply could not apply to 2025 returns.)
Effective for Tax Years Beginning After Dec 31, 2026:
- Scholarship Granting Organization provisions. (Another practical effective date exists, as the related federal tax credit will not take effect until 2027. Technically, all of these provisions are effective immediately, with the exception of ARS §43-1803, which pertains to organizations issuing SGO scholarships.)

Prepared with assistance from NotebookLM.