2021 Arizona Individual Income Tax Rates for High Income Earners are Uncertain

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2021 Arizona Individual Income Tax Rates for High Income Earners are Uncertain

While the 2021 Arizona individual income tax brackets look similar to prior years (with a maximum 4.5% rate), potential adjustments, options and variations may pile on as an Arizona taxpayer’s income increases. Following is a summary of the potential rate alternatives.

Proposition 208 – The fate of this 3.5% surcharge is uncertain after being challenged in court as being unconstitutional due to spending limitations. The State Supreme Court remanded the case back to the trial court, and at present, we are awaiting the lower court’s ruling on the issues or for the state legislature to act this session. For now, the 3.5% surcharge tax on taxable income of $250,000 (single, married filing separate) and $500,000 (married filing joint) is current law.

AZ SBI flat 3.5% tax election – SB 1783 provides taxpayers a voluntary election to report specific types of income on a separate “Small Business Income” (SBI) tax return and subject all of that income to a flat 3.5% tax rate. Some rules and regulations are yet to be clarified by the Arizona Department of Revenue, but this election remains an option for 2021.

2.5% flat tax – Passed last year, this proposal was successfully challenged, and it is anticipated that it will be on the November 2022 ballot. However, efforts are underway at the legislature to repeal the original law and replace it with a new 2.5% flat tax. The challenge is that it is uncertain when this 2.5% flat tax will be effective and it could be retroactive to 2021.

Careful consideration is needed for individuals with an effective tax rate in excess of 3.5% prior to filing the 2021 Arizona income tax return. This may require an extension, as we await guidance from the state, to ensure you are not over paying Arizona income tax liabilities.