How Do I Deduct a Military Spouse's Income on an Arizona Return?

Arizona does not provide a specific subtraction labeled "military spouse income." How military pay and a military spouse's income are treated depends on the residency status of the service member and spouse.

If the Service Member Is an Arizona Resident

If the service member was an Arizona resident when entering military service, Arizona generally considers that individual to remain an Arizona resident until a new domicile is established. As an Arizona resident, all income must be reported on the Arizona return, regardless of where the service member is stationed. However, active-duty military pay included in federal adjusted gross income may be subtracted on the Arizona return. 

Program Entry

1. Go to State.
2. Select Arizona Resident Return.
3. Open Subtractions From Income.
4. Enter the Active Duty Military/Reserve/National Guard Pay amount.
5. Save your changes.

If the Service Member Is a Nonresident Stationed in Arizona

A nonresident active-duty service member stationed in Arizona is not subject to Arizona income tax on military pay. If military wages were the only income received and no Arizona tax was withheld, an Arizona return is generally not required. If Arizona tax was withheld in error, a nonresident return may be filed to claim a refund. 

To Exclude Active-Duty Military Pay

1. Go to Federal.
2. Select Income > My Forms.
3. Open the W-2 for the service member.
4. Edit the W-2.
5. Remove the Arizona state wages reported in Box 16 while leaving Arizona withholding in Box 17.
6. Continue and save.

If One Spouse Is an Arizona Resident and the Other Is Not

When one spouse is an Arizona resident and the other is a nonresident, Arizona generally requires filing a nonresident return (Form 140NR) and properly allocating income between the spouses. Because Arizona is a community property state, income allocation rules can be complex and must be applied carefully. Arizona's filing requirements for mixed-residency couples are addressed in Arizona tax rulings regarding joint returns involving resident and nonresident spouses.

In these situations, be sure to allocate:

• The Arizona resident spouse's income.
• The nonresident spouse's income.
• Community income, when applicable under Arizona law.

Proper allocation is important because incorrect treatment of community income can affect both taxable income and refund amounts.