The Arizona Department of Revenue is urging residents to file their 2025 income tax returns on schedule despite the state lacking an approved tax code that conforms to recent federal changes, a situation that could force roughly one million taxpayers to amend their filings and cost the state $20 million to process.
The unusual predicament stems from an ongoing political standoff between Gov. Katie Hobbs and Republican lawmakers over how much of the federal tax code—specifically provisions from last year’s Republican tax and spending bill—should be adopted at the state level. During a Senate committee hearing, a Department of Revenue employee warned that about a third of Arizona filers could face amendments if they submit returns before lawmakers settle the dispute.
The Conformity Standoff
Arizona typically conforms its tax code to the federal Internal Revenue Code to simplify filing for residents. But full conformity to the 2025 “One Big Beautiful Bill Act” would cost the state more than $440 million annually, according to legislative analysts.
That steep price tag has created a partisan divide. Gov. Hobbs issued an executive order in November 2025 directing the Department of Revenue to release 2025 tax forms based on her preferred approach: an increased standard deduction of $15,750 for single filers and $31,500 for married couples filing jointly, along with exemptions for tips and overtime income, expanded deductions for seniors aged 65 and older, and interest deductions for U.S.-built car purchases.
Republican lawmakers are pushing competing legislation through bills HB 2153 and SB 1106. Their approach would update the state’s Internal Revenue Code reference to January 1, 2026, couple standard deductions to federal rules, and add subtractions for tips, overtime, dependent care, and retirement income. The GOP bills would also cap charitable contribution add-backs at $1,000 for single filers and $2,000 for joint filers, and raise adoption cost subtractions to $5,000 for single filers and $10,000 for joint filers starting in 2026.
“That would be sad,” Sen. J.D. Mesnard, a Republican, said regarding the potential need for mass amendments. “And then we’ll sort of have to cross that bridge when we come to it.”
What’s at Stake for Taxpayers
Arizona uses a flat 2.5% income tax rate on 2025 taxable income, which residents will report when filing in 2026. Returns are due April 15, 2026, with extensions available until October 15.
The problem is that the Department of Revenue has already released forms reflecting Gov. Hobbs’ proposals—changes that haven’t been approved by the legislature. Sen. Mitzi Epstein, a Democrat, noted during committee hearings that the forms don’t even include all of Hobbs’ proposals, such as the tips and overtime exemptions.
Ed Dollars, a CPA who has analyzed the competing bills, warned that resolution may not come quickly. “It may take quite a while before we get a complete answer,” he said.
For the roughly one million taxpayers who file early—about a third of Arizona’s total filers—the risk is clear: submit a return based on current forms, then potentially have to amend it later if lawmakers approve different provisions. Amendments take time, create confusion, and would burden the state with an estimated $20 million in processing costs.
Federal Changes Driving the Dispute
The federal “One Big Beautiful Bill Act” added new deductions under Internal Revenue Code Section 63 for tips, overtime, dependent care, and retirement income. These deductions don’t reduce federal adjusted gross income, which creates complications for states like Arizona that use federal AGI as their starting point.
Arizona lawmakers are debating whether to adopt these provisions wholesale or pick and choose. The Republican bills would adopt most federal changes retroactively to December 31, 2024, but would decouple from certain itemized state and local tax deductions and exclude “Trump Accounts” created under IRC Section 530A for deposits starting July 4, 2026.
Full conformity would simplify filing—taxpayers could use the same deductions at both levels—but the revenue loss has made that politically untenable. The state’s flat tax structure means every deduction directly reduces revenue, unlike progressive tax systems where higher earners offset losses.
Filing Timing and Ongoing Uncertainty
Arizona tax filings are proceeding while lawmakers continue to debate how closely the state tax code should conform to recent federal changes. Although the legislature reconvened in January 2026, officials have not provided a timeline for resolving the dispute.
The Arizona Department of Revenue has released 2025 tax forms based on the governor’s proposed framework, even though conformity legislation has not yet been finalized. If lawmakers adopt a different version of the tax code, some returns filed using the current forms may require amendments.
Arizona’s flat 2.5% income tax rate applies regardless of which conformity provisions are ultimately approved. However, final tax liability will depend on which deductions and subtractions lawmakers authorize and whether those changes apply retroactively.
Proposed subtractions affecting tips, overtime income, retirement distributions, and adoption expenses remain under consideration. The availability of those benefits will depend on the final legislation enacted during the session.
State lawmakers have historically resolved conformity decisions before most taxpayers file, but the estimated $440 million difference between full federal conformity and the governor’s proposal has extended negotiations this year. As a result, uncertainty is expected to persist into the filing season until legislative action is completed.