Arizona income tax starts with your federal adjusted gross income. That means most deductions you claim federally already reduce your Arizona tax automatically. Business expenses, depreciation, retirement contributions, and health insurance premiums all flow through from your federal return.

Beyond what carries over from federal, Arizona allows subtractions for certain types of income. U.S. government interest from Treasury bonds and savings bonds can be subtracted. Social Security benefits that were taxed federally can be excluded. Military retirement pay and certain other military compensation get favorable treatment. These subtractions reduce your Arizona taxable income below what you reported federally.

The real Arizona-specific opportunities are tax credits rather than deductions. Credits reduce your tax bill directly instead of just lowering taxable income, making them more valuable dollar-for-dollar.

Arizona’s school tax credit lets you contribute to public schools or private school tuition organizations and receive a credit against your state tax. Married couples filing jointly can claim several hundred dollars for public school contributions and over two thousand for private school tuition organizations. You’re essentially redirecting money you’d pay in taxes to schools you choose.

The qualifying charitable organization credit works similarly. Donations to approved charities that serve the working poor earn you a direct credit. The charities must be on Arizona’s approved list, and there are annual limits on how much you can claim.

For small business owners, the focus should be on capturing every legitimate federal deduction since that’s what drives your Arizona starting point. Tax preparation that misses federal deductions costs you twice because you lose the benefit on both returns.

This is where consistent record-keeping matters. Business owners who track expenses throughout the year claim more deductions than those scrambling to reconstruct records at tax time. Small business bookkeeping services that maintain organized records make it possible to identify deductions you’d otherwise forget or fail to document properly.

Arizona’s flat tax rate means every dollar of deductions and credits has the same impact regardless of your income level. Missing deductions or credits you’re entitled to is simply leaving money on the table.