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ARIZONA STATE SENATE
Fifty-Seventh Legislature, First Regular Session
income tax; subtraction; retirement distribution
Purpose
Establishes individual income tax subtractions for the amount of any distributions from a pension or retirement account by persons who are at least 59.5 years old and for contributions to an individual retirement account (IRA) or a Roth IRA.
Background
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 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. To the extent not already excluded from Arizona gross income under the U.S. Internal Revenue Code (U.S. IRC), up to $2,500 of any federal or state employee benefits, annuities and pensions is subtracted from Arizona gross income when computing Arizona adjusted gross income (A.R.S. §§ 43-1001; 43-1021; and 43-1022; IRS).
Federal law defines several types of pension and retirement accounts in the U.S. IRC, including: 1) a trust created or organized in the United States and forms part of pension constitutes a qualified trust, or a 401a; 2) a tax-sheltered annuity offered by public schools and certain tax-exempt organizations, or a 403b; 3) a deferred compensation plan, or a 457b; 4) an IRA, or a 408a; 5) a Roth IRA, or a 408; 6) a simplified employee pension, or a 408k ; and 7) a simple retirement accounts, or a 408p (I.R.C. §§ 401; 403; 457; 408; 408(a); 408(k) and 408(p)).
If establishing individual tax subtractions for contributions to a retirement account, pension, IRA or Roth IRA results in a change to individual income tax collections, there may be a fiscal impact to the state General Fund.
Provisions
1. Establishes individual income tax subtractions for:
a) the amount of any distributions from a pension or retirement account for persons who are at least 59.5 years old to the extent not already excluded from Arizona gross income; and
b) the amount contributed to an IRA and a Roth IRA during the taxable year to the extent that the contributions were not deducted in computing federal adjusted gross income.
2. Defines pension and retirement account.
3. Applies the new individual income tax subtractions to taxable years beginning January 1, 2025.
4. Becomes effective on the general effective date.
Prepared by Senate Research
February 6, 2025
MG/KP/ci