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ARIZONA HOUSE OF REPRESENTATIVES57th Legislature, 2nd Regular Session |
House: WM DPA 5-4-0-0 |
HB 2785: conformity; internal revenue code; deductions
Sponsor: Representative Olson, LD 10
Caucus & COW
Overview
Conforms the Arizona tax statutes to the U.S. Internal Revenue Code (IRC) of 1986, as amended, and in effect as of January 1, 2026, including those provisions that became effective during 2025 with the specific adoption of all the retroactive effective dates, but excluding any changes to the IRC enacted after January 1, 2026. Establishes individual income tax subtractions from Arizona gross income and modifies income tax deductions.
History
Current law conforms Arizona's income tax calculation to the IRC of 1986, as amended, in effect on January 1, 2025, including those provisions that became effective during 2024 with the specific adoption of all retroactive effective dates, but excluding any changes to the code enacted after January 1, 2025. (A.R.S. § 43-105)
Generally, each year changes are made to the IRC that affect the Arizona income tax calculation. Tax conformity with the IRC is deemed necessary because the calculation of Arizona corporate income tax begins with federal taxable income and the federal adjusted gross income (FAGI) is the starting point for individual income tax.
On July 4, 2025, major federal tax changes were enacted through H.R. 1 that impact federal taxable income and FAGI which the state would conform to by updating the statutory definition of the IRC.
Provisions
Conformity
1. Conforms the Arizona tax statutes to the IRC of 1986, as amended, and in effect as of January 1, 2026, including those provisions that became effective during 2025 with the specific adoption of all the retroactive effective dates, but excluding any changes to the IRC enacted after January 1, 2026. (Sec. 2)
2. Updates the definition of IRC, for Tax Year (TY) 2025 to include the provisions that became retroactively effective during TY 2025. (Sec. 1, 2)
Subtractions from Arizona Gross Income
3. Includes, for taxable years beginning January 1, 2025, the following subtractions from Arizona gross income (AGI) to the extent they are not already excluded from AGI under the IRC:
a. an amount up to $6,000 or $12,000 depending on filing status for taxpayers that are 65 years old before the close of the taxable year under Section 151(d)(5)(C) of the IRC;
b. the amount of qualified passenger vehicle loan interest under Section 163(h)(4);
c. the amount of qualified tips received during the TY that is deducted under Section 24 of the IRC; and
d. the amount of qualified overtime compensation received during the TY that is deducted under Section 225 of the IRC. (Sec. 5)
Deductions from Taxable Income
4. Redefines standard deduction to the amount of the federal basic standard deduction pursuant to Section 63 of the IRC. (Sec. 6)
5. Changes the allowable charitable deduction amount for taxpayers that utilize the standard deduction, beginning with TY 2026, to not more than $1,000 or $2,000 depending on filing status. (Sec. 6)
6. Removes the inflation adjustment in determining when a taxpayer is required to file a return. (Sec. 3)
7. Effective on the general effective date and applies retroactively to taxable years beginning on January 1, 2025. (Sec. 8)
8. Makes technical and conforming changes. (Sec. 2, 3, 4, 6)
Amendments
Committee on Ways & Means
1. Specifies the taxable years for the retroactive provisions associated with Public Law 119-21. (Sec. 2)
2. Conforms what is considered to be foreign dividends to Section 951A of the IRC. (Sec. 7)
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Initials VP HB 2785
2/4/2026 Page 0 Caucus & COW
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