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Tax Year 2026Updated July 13, 2026

Does Arizona Tax Tips in 2026?

No - Arizona does not tax tips that qualify for the federal OBBBA deduction in 2026. Arizona adopted the Internal Revenue Code through early 2026 via SB 1171, capturing the OBBBA tips deduction (IRC §224, up to $25,000). Because Arizona starts from federal AGI and the tips deduction is an above-the-line deduction that reduces AGI, Arizona tip workers automatically receive the state tax benefit when they claim the federal deduction.

How Arizona's Tips Tax Treatment Works

Arizona conforms to the OBBBA tips deduction through its IRC adoption mechanism. In the 2025 legislative session, Arizona passed SB 1171, which adopted the Internal Revenue Code as amended through early 2026. This adoption captures all OBBBA provisions, including the tips income deduction under IRC §224. Arizona did not need to pass a separate "no tax on tips" bill - the IRC conformity update accomplished the same result.

Arizona computes its income tax starting from federal adjusted gross income (AGI), then applies Arizona-specific additions and subtractions to arrive at Arizona taxable income. The OBBBA tips deduction is an above-the-line deduction that reduces federal AGI before Arizona’s calculation begins. This means the deduction is already reflected in Arizona’s starting point. The Arizona Department of Revenue has confirmed this flow-through: tip workers who claim the federal deduction will have a lower Arizona taxable income by the same amount.

This IRC adoption approach differs from structural flow-through states (like Colorado) in one important respect: Arizona must periodically pass legislation to update its IRC adoption date. If Arizona’s legislature fails to adopt a future IRC version, new federal provisions might not flow through. However, for the OBBBA tips deduction effective 2025 - 2028, SB 1171’s adoption date is current and the conformity is confirmed.

Federal Tips Deduction Quick Reference

DetailValue
IRC Section§224 (OBBBA)
Maximum deduction$25,000 tips
Deduction typeAbove-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 datesJan 1, 2025 – Dec 31, 2028
Arizona treatmentConforms

Worked Examples Comparing Federal and Arizona Treatment

Example 1: Restaurant server earning $20,000 in tips (single filer, 12% federal bracket)

Federal return:
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 2.5% flat rate applies to the reduced Arizona taxable income. The $20,000 tips deduction reduces federal AGI, which is Arizona’s starting point, saving $500.00 in Arizona state tax.

Example 2: Bartender earning $35,000 in tips (single filer, 22% federal bracket)

Federal return:
Qualified tip income: $35,000
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
The deduction is capped at $25,000 federally. That capped amount flows through to reduce Arizona taxable income by the same amount, since Arizona adopted the IRC including OBBBA provisions via SB 1171.

Arizona-Specific Rules and Considerations

Low flat rate advantage: Arizona’s flat 2.5% income tax rate is among the lowest in the nation for states with an income tax. While the state tax savings per dollar of tips deducted ($2.5 cents per dollar) is modest compared to higher-rate states, Arizona tip workers benefit from the combination of a low overall rate and full OBBBA conformity.

Form A-4 withholding: Arizona uses an elective withholding system where employees choose their withholding percentage via Form A-4. Tip workers should ensure their A-4 election accounts for the tips deduction when estimating their Arizona tax liability. The default supplemental rate is 2.0%, but employees can elect different percentages.

No state payroll tax on tips: Unlike some states with paid family leave programs, Arizona does not impose a separate state payroll tax. The only payroll taxes on Arizona tip income are federal FICA (Social Security 6.2% + Medicare 1.45%). This makes Arizona one of the lighter-burden states for tip workers overall.

W-2 reporting and IRC adoption: Arizona’s SB 1171 adoption means the state recognizes the W-2 Box 12 Code TP reporting requirement for qualifying tips. Employers in Arizona follow the same federal reporting rules - no separate Arizona wage code exists.

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Frequently Asked Questions

Does Arizona conform to the OBBBA no-tax-on-tips provision?
Yes. Arizona adopted the Internal Revenue Code as amended through early 2026 via SB 1171 (2025 legislative session). This adoption captures the OBBBA tips deduction (IRC §224). The deduction reduces federal AGI, and Arizona uses federal AGI as its starting point with Arizona-specific modifications. The Arizona Department of Revenue (ADOR) has confirmed the flow-through.
Do I still pay FICA on my tips in Arizona?
Yes. The OBBBA tips deduction only applies to federal and state income taxes. Social Security tax (6.2%) and Medicare tax (1.45%) still apply to all reported tip income. Arizona does not have a separate state payroll program like PFML, so there is no additional state payroll tax on tips.
What is SB 1171 and how does it affect Arizona tip workers?
SB 1171, passed in Arizona’s 2025 legislative session, is an IRC conformity update bill. It adopts the Internal Revenue Code as in effect through early 2026, which includes all OBBBA provisions. This means Arizona recognizes the federal tips deduction without needing a separate Arizona-specific tips law. The adoption is the legal mechanism by which Arizona conforms.
Is there a cap on the Arizona tips deduction?
The cap comes from the federal provision: $25,000 per year (IRC §224). Arizona does not impose a separate state cap. Since Arizona adopted the IRC including §224, the same $25,000 limit applies for both federal and Arizona purposes.
Do I need to file a special Arizona form to claim the tips deduction?
No special Arizona form is needed for the tips deduction itself. You claim the deduction on your federal return (Schedule 1-A), which reduces your federal AGI. Arizona Form 140 starts from federal AGI, so the deduction is already reflected in your Arizona starting point. Arizona modifications (additions and subtractions) are separate and do not affect the tips deduction.
How does Arizona's IRC adoption differ from structural flow-through states?
Arizona adopts the IRC by reference through a specific legislative act (SB 1171), meaning the state legislature must periodically pass a new adoption bill to capture recent federal changes. In contrast, structural flow-through states like Colorado automatically incorporate changes because they tax federal taxable income directly. Arizona’s approach is still strong conformity, but it depends on the legislature updating the IRC adoption date.
Can Married Filing Separately filers claim the tips deduction in Arizona?
No. The federal OBBBA tips deduction (IRC §224) excludes Married Filing Separately filers. Since Arizona’s conformity flows through the federal IRC adoption, MFS filers cannot claim the tips deduction at either the federal or Arizona level.