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ARIZONA STATE SENATE
Fifty-Seventh Legislature, First Regular Session
income tax subtraction; capital gains
Purpose
Applies, to taxable years beginning January 1, 2026, the 25 percent individual income tax subtraction for net long-term capital gains included in federal adjusted gross income to all assets, rather than only assets acquired beginning January 1, 2012.
Background
A capital gain is acquired when an individual sells an asset for more than it cost. Capital gains are classified as long-term or short-term gains. A long-term capital gain applies to assets that an individual holds for at least one year before they dispose of it. A short-term capital gain applies to assets that are held for one year or less (IRS).
Individual income tax is levied on Arizona residents’ taxable income. The tax base begins with Arizona gross income, which is equivalent to the taxpayer's federal adjusted gross income. Statute authorizes various amounts, such as net-long term capital gain, to be added or subtracted when computing an individual's Arizona adjusted gross income, which is further reduced by standard or itemized deductions to arrive at Arizona taxable income. For taxable years beginning January 1, 2015, statute allows a 25 percent individual income tax subtraction of net long-term capital gains included in federal adjusted gross income that is derived from an asset acquired after January 1, 2012 (A.R.S. § 43-1022).
If allowing taxpayers to subtract net long-term capital gains derived from investment in any asset, rather than only assets acquired beginning January 1, 2012, from Arizona gross income results in a change to individual income tax collections, there may be an impact to the state General Fund.
Provisions
1. Expands, beginning taxable year January 1, 2026, the 25 percent individual income tax subtraction for net long-term capital gains included in federal adjusted gross income by applying the subtraction to all assets, rather than only assets acquired beginning January 1, 2012.
2. Makes technical and conforming changes.
3. Becomes effective on the general effective date.
Prepared by Senate Research
February 6, 2025
AL/MG/ci