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ARIZONA STATE SENATE
Fifty-Seventh Legislature, First Regular Session
AMENDED
income tax; subtraction; retirement distribution
Purpose
Establishes an individual income tax subtraction for distributions from a retirement account by persons who are at least 67 years old and caps the total subtraction at the amount of the standard deduction.
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. A taxpayer may elect to take a standard deduction in lieu of all itemized deductions. For TY 2024, the standard deduction is: 1) $14,600 for a single person or a married person filing separately; 2) $21,900 for a head of household; or 3) $29,200 for a married couple filing jointly. The standard deduction is adjusted annually for inflation. 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; 43-1022; and 43-1041; 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 individual retirement account (IRA), or a 408; 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)).
The Joint Legislative Budget Committee fiscal note on S.B. 1371, as amended by the Senate Finance Committee, estimates a reduction of state General Fund revenue of $386.7 million annually beginning in FY 2026. The estimate does not reflect potential dynamic effects, which are typically secondary to the direct impact (JLBC fiscal note).
Provisions
1. Establishes an individual income tax subtraction for the amount of any distributions from a retirement account for persons who are at least 67 years old to the extent not already excluded from Arizona gross income.
2. Caps the total amount of the subtraction for retirement distributions at the amount of the standard deduction.
3. Defines retirement account.
4. Applies the new individual income tax subtraction to taxable years beginning January 1, 2025.
5. Becomes effective on the general effective date.
Amendment Adopted by the Committee
1. Caps the total amount of the individual income tax subtractions for pension or retirement distributions and IRA contributions at the amount of the standard deduction.
2. Raises the age, from 59.5 years old to 67 years old, for the individual income tax subtraction for distributions from a pension or retirement account.
3. Removes Roth IRAs from the individual income tax subtraction for IRA contributions.
Amendment Adopted by the Committee of the Whole
1. Eliminates the income tax subtraction for amounts contributed to an IRA during the taxable year.
2. Removes pension distributions from the individual income tax subtraction for individuals who are 67 years or older.
3. Makes conforming changes.
Senate Action
FIN 2/17/25 DPA 4-3-0
Prepared by Senate Research
March 4, 2025
MG/KP/ci