Taxpayers Who Have Already Filed Do Not Need to Amend Their Returns
Although this change has occurred during tax season, ADOR is working alongside its tax software vendor partners to amend its individual income tax forms and tax administration system in response to the law change. Due to tax law changes made by the Legislature in 2021, however, the change will not impact an individual’s overall income tax liability. As a result, taxpayers who file their Arizona individual income tax returns using current forms and instructions will not need to amend their returns. ADOR will hold these returns and process them correctly once it has modified its tax system to remove the surcharge and amend the tax bracket rates. At that time, ADOR will automatically adjust the returns to provide for the correct distribution of monies.
What If I Have Not Filed?
Despite the fact that this change is occurring in the midst of tax season, ADOR is working as quickly as possible to correct individual income tax forms by eliminating the Proposition 208 Surcharge line and adjusting the individual income tax brackets to the proper rates. ADOR is also working with its tax software vendor partners to change their individual tax forms and tax brackets. While ADOR is acting on the law change, it may take some time before the changes are fully visible to the general public. If you choose to file before the individual tax forms and tax rate tables are corrected, ADOR will simply hold your return in suspense and process it correctly once ADOR has modified its tax system, with no additional filing or response required from you.
In the meantime, ADOR strongly urges Arizona taxpayers to file your return using the current form and following the current instructions using the Proposition 208 Surcharge line and indicated individual income tax rates. Because of the 2021 tax law changes, the total amount you owe in taxes will remain the same, and you will not have to take any further action to amend your return.
What Was the Proposition 208 Surcharge?
Proposition 208 added a 3.5% individual income tax surcharge for public education on the portion of taxable income over $250,000 and $500,000 in the case of married couples filing jointly. The surcharge was in addition to the top regular income tax rate of 4.5%, which would have resulted in a top combined rate of 8% had further action not been taken.
2021 Tax Law Changes Prevented an Increase in Overall Individual Income Tax Liability
As part of the 2021 budget reconciliation process, statutory changes were enacted to ensure that the combined rate of the Proposition 208 Surcharge and top regular income tax rate could not exceed 4.5%. The changes further required that, if the combined rate exceeded 4.5%, the top regular income tax rate would be adjusted downward to bring the combined rate to 4.5%. Therefore, with the 3.5% Proposition 208 surcharge, the top income tax rate was reduced to 1% to bring the combined rate to 4.5%.
There Will Be No Net Change to Individual Income Tax Liability from the Injunction of the Surcharge
With Proposition 208 voided as unconstitutional, the Proposition 208 Surcharge due from taxpayers drops to 0%. Under current law, this means that the top income tax rate will return to 4.5%. Arizona taxpayers will neither owe more tax nor receive a larger refund due to the voiding of the Proposition 208 Surcharge. Instead, the monies that taxpayers have paid toward the Proposition 208 Surcharge will be applied to satisfy taxpayers’ regular Arizona individual income tax liabilities for the same tax year.
Regardless of the tax form you ultimately use, your return will be due on Monday, April 18, 2022, unless you request an extension on or before that date.