According to the Arizona Instruction Booklet, "You must file if you meet the Arizona filing requirements unless all of the following apply to you:
- You are an active duty member of the United States armed forces.
- Your only income for the taxable year is pay received for active duty military service.
- There was no Arizona tax withheld from your active duty military pay.
...If you were an Arizona resident when you entered the service, you remain an Arizona resident, no matter where stationed, until you establish a new domicile."
If you are resident of Arizona, you must include all of your wages to Arizona, no matter where you are stationed. You must include your military wages, by using Form 140, you may subtract the pay received for active duty military service; up to the extent it is included in your federal adjusted gross income.
The active duty military pay can be excluded from the resident return by following these steps in the program:
- State Section
- Edit Arizona Resident state return
- Subtractions from Income
- Enter Active Duty Military/Reserve/National Guard Pay
"If you are a nonresident of Arizona, but stationed in Arizona, the following applies to you:
- You are not subject to Arizona income tax on your military pay
- You must report any other income you earn in Arizona. Use Form 140NR, Nonresident Personal Income Tax Return, to report this income."
If you are a nonresident stationed in Arizona, you are not required to file an Arizona return if you are an Active Duty member of the US armed forces whose only source of income is military pay and no Arizona taxes were withheld.
If the employer withheld Arizona taxes in error, you will need to file a nonresident return to claim a refund. To exclude the active duty pay from the nonresident return, follow the steps below:
- Federal Section
- Income (Enter Myself)
- Wages and Salaries
- Edit the servicemember's W-2
- Remove the amount listed in Box 16 for state wages, leave amount of state withholdings in Box 17; click Continue to Save.
If one spouse is a resident and the other is not, file a nonresident return and allocate the income on the return. Since Arizona is a community property state, you must make sure to allocate the income correctly. Please refer to Arizona Individual Income Tax Ruling ITR-14-1 for specific filing instructions.