Does Arizona Tax Your Tips and Overtime in 2026?

Arizona does not tax qualifying tips and overtime pay in 2026. On June 13, 2026, Arizona enacted House Bill 4168, creating state income tax subtractions that mirror the federal One Big Beautiful Bill Act (OBBBA) deductions. The tax relief applies retroactively to tax years beginning after December 31, 2024.

Key takeaways for Arizona workers

• Arizona HB 4168 provides a 100 percent state tax subtraction for qualifying tips and overtime.
• Taxpayers save Arizona’s flat 2.5 percent income tax rate on all deducted earnings.
• The deduction is claimed on Arizona Form 140 Schedule A(2).
• Arizona workers can adjust state withholding on Arizona Form A-4 alongside federal Form W-4.

Arizona conformity under House Bill 4168

Arizona operates a rolling conformity code but often enacts specific statutory modifications. Under HB 4168, the Arizona legislature created specific subtractions from Arizona gross income under Arizona Revised Statutes section 43-1022. Read about nationwide conformity in our state conformity guide and check administrative rules at the Arizona Department of Revenue.

The Arizona law allows individuals to subtract the exact amount of qualified tips and qualified overtime compensation claimed on federal Schedule 1-A. Because Arizona operates a flat 2.5 percent individual income tax rate, every $1,000 deducted saves $25 in Arizona state tax, in addition to federal income tax savings.

Arizona workers in hospitality, mining, aerospace, and construction benefit from this dual relief. Both the federal government and the state government exempt the qualifying compensation from income tax.

Filing Arizona Form 140 Schedule A(2)

To claim the Arizona state tax benefit, file your federal Schedule 1-A first to establish your qualified deductions. Then enter the amounts on Arizona Form 140 Schedule A(2), Subtractions from Gross Income.

The subtractions reduce Arizona adjusted gross income directly. For a culinary worker in Scottsdale who earns $24,000 in qualifying tips, the Arizona subtraction lowers state taxable income by $24,000, producing a state tax savings of $600. Combined with a federal tax reduction of $2,880 in the 12 percent federal bracket, total annual tax savings reach $3,480.

For an overtime worker in a Tucson manufacturing plant who claims $8,000 in qualified overtime, the Arizona subtraction lowers state tax by $200 ($8,000 x 2.5 percent), adding to federal tax savings of $1,760 in the 22 percent federal bracket.

Updating Arizona Form A-4 withholding

Arizona allows employees to select a specific state withholding percentage on Arizona Form A-4, ranging from 0.5 percent to 3.5 percent of gross taxable wages. Because HB 4168 reduces your annual tax liability, you can submit a revised Form A-4 to your employer to lower your withholding rate. Follow our W-4 adjustment guide for federal withholding adjustments.

Choosing a lower percentage on Form A-4 ensures that your state tax savings are distributed across your paychecks during the year, rather than waiting for an annual refund. Submitting updated forms for both federal and state payroll withholding synchronizes your take-home pay with your actual annual tax obligations.

Maximizing savings for Arizona service and trade workers

Arizona has substantial service, resort, and construction industries in Phoenix, Tucson, and Flagstaff. Whether you earn tips in a resort restaurant or work overtime in commercial construction, verify your eligibility on the IRS qualifying tipped occupations list or check your overtime on our overtime calculation guide.

Keep thorough records of pay stubs and Form W-2 Box 12 codes to substantiate both federal and state deductions in case the Arizona Department of Revenue requests documentation. Retaining records for four years satisfies both federal and Arizona statutory audit windows.

Frequently asked questions

Is the Arizona deduction retroactive to 2025?

Yes. HB 4168 applied retroactively to tax years beginning after December 31, 2024. Taxpayers who did not claim the state deduction on their 2025 Arizona return can file Form 140X to claim a refund.

What is the Arizona state tax rate on tips and overtime?

Because Arizona conforms fully to OBBBA, qualifying tips and overtime are taxed at zero percent. For non-qualifying income, Arizona levies a flat 2.5 percent income tax rate.

Do Arizona independent contractors qualify?

Self-employed individuals in qualifying occupations can claim the tip deduction on Schedule 1-A, which then flows to the Arizona return. Self-employment tax still applies at the federal level.

Where do I find my qualifying numbers?

Check Form W-2 Box 12 code TP for tips and code TT for overtime. These reported amounts form the basis for both your federal and Arizona deductions.

This article is general information, not tax advice. Tax rules and payroll reporting require exact records. Consult a qualified CPA, Enrolled Agent, or tax attorney regarding your individual return.