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ARIZONA STATE SENATE
Fifty-Seventh Legislature, First Regular Session
income tax; subtraction; tipped wages
Purpose
Establishes, for taxable years beginning January 1, 2025, an individual income tax subtraction for tips received during the taxable year that are reported to the employer.
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 (A.R.S. § 43-1022).
All tips
received by an employee are income and subject to federal and state income tax.
The U.S. Internal Revenue Code (U.S. IRC) requires cash tips received by an
employee in any calendar month to be reported to the employer, unless the total
tips received are less than $20. Cash tips include tips received from
customers, charged tips distributed to the employee by the employer and tips
received from other employees under any tip-sharing arrangement (26
U.S.C
§ 6053 and U.S.
IRC).
The Joint Legislative Budget Committee fiscal note estimates that H.B. 2081 would reduce state General Fund revenues by $31 million annually beginning in FY 2026. The estimate does not include potential dynamic economic impacts (JLBC fiscal note).
Provisions
1. Establishes, for taxable years beginning January 1, 2025, an individual income tax subtraction for compensation received as tips during the taxable year that are reported to the employer, to the extent that the tips are not already excluded from Arizona gross income under the U.S. IRC.
2. Becomes effective on the general effective date.
House Action
WM 1/22/25 DPA 5-3-0-1
3rd Read 2/10/25 37-21-2
Prepared by Senate Research
February 26, 2025
MG/ci