Does Arizona Tax Tips in 2026?
No - Arizona subtracts the federal tips deduction. HB 4168 (Laws 2026, Chapter 140, approved June 13, 2026) added an Arizona subtraction for qualified tips deducted under IRC §224, for taxable years beginning after December 31, 2024. At Arizona's 2.5% flat rate, the full $25,000 federal cap is worth about $625 in Arizona tax.
How Arizona's Tips Tax Treatment Works
Arizona's starting point: Form 140 begins on line 12 with federal adjusted gross income. The federal tips deduction is figured on Schedule 1-A after AGI, so by itself it would not reduce Arizona income.
The state subtraction: Section 15 of HB 4168 added paragraph 31 to A.R.S. 43-1022: a subtraction for "the amount of qualified tips received during the taxable year that is deducted under section 224 of the Internal Revenue Code," to the extent not already excluded. Section 35 makes it retroactive to taxable years beginning after December 31, 2024.
Claiming it: for 2025, the subtraction is entered on Form 140, page 6, line V (Other Adjustments), using ADOR's worksheet. Because it is an adjustment to income, you must file Form 140 rather than Form 140A or 140EZ.
Federal Tips Deduction Quick Reference
| Detail | Value |
|---|---|
| IRC Section | §224 (OBBBA) |
| Maximum deduction | $25,000 tips |
| Deduction type | Above-the-line (Schedule 1-A) |
| FICA still applies? | Yes (Social Security 6.2% + Medicare 1.45%) |
| MFS eligible? | No (MFJ or Single/HoH only) |
| Effective dates | Jan 1, 2025 – Dec 31, 2028 |
| Arizona treatment | Conforms |
Worked Examples Comparing Federal and Arizona Treatment
Example 1: Restaurant server with $20,000 in tips (single filer, 12% federal bracket)
Qualified tip income: $20,000
Tips deduction claimed: $20,000 (capped at $25,000)
Estimated federal tax savings: $2,400.00
Arizona return:
State tax savings from deduction: $500.00
Arizona's own subtraction (A.R.S. 43-1022, added by HB 4168) removes the same $20,000 from Arizona income, saving about $500 at the 2.5% flat rate. For 2025 the subtraction goes on Form 140, page 6, line V.
Example 2: Bartender at the federal cap, $25,000 deducted (single filer, 22% federal bracket)
Qualified tip income: $25,000
Tips deduction claimed: $25,000 (capped at $25,000)
Estimated federal tax savings: $5,500.00
Arizona return:
State tax savings from deduction: $625.00
Arizona's subtraction follows the amount deducted federally, so it is capped at $25,000 as well. At 2.5%, that is about $625 of Arizona tax saved.
Arizona Notes
Flat 2.5% rate: every dollar subtracted saves 2.5% of Arizona tax, so the value is easy to estimate.
Service workers: servers, bartenders, hair stylists, rideshare and delivery drivers, and others in customarily tipped occupations can use the subtraction for qualified tips they deduct federally. Employers report qualified tips on Form W-2, box 12, code TP starting with 2026 wages.
Time limit: the federal tips deduction runs through 2028; Arizona's subtraction follows the federal amount.
Senior deduction too: HB 4168 also added a subtraction for the federal senior deduction (IRC §151(d)(5)(C)), with the same retroactive start.
Related Tools
- No Tax on Tips Calculator - calculate your federal tips deduction
- Arizona Tax Guide - full state tax overview
- Arizona Paycheck Calculator
- Does Arizona Tax Overtime?
- W-2 Code TP: Tips Reporting Guide
- W-2 Code TT: Overtime Reporting Guide
- All 51 States: Tips & Overtime Tax Map