Arizona Nonresident Filing Requirements: Do You Need to File Taxes?
Understand Arizona tax obligations for nonresidents, including income sources and filing thresholds, to ensure compliance and avoid penalties.
Understanding tax obligations as a nonresident in Arizona is essential for compliance and avoiding penalties. With varying rules across states, knowing the specific filing requirements that apply to you if you’re earning income from Arizona sources is critical.
Who Is a Nonresident
In Arizona tax law, a nonresident is someone who does not reside in the state but earns income from Arizona sources. Residency is determined by physical presence and intent to remain in the state. Individuals with a permanent home outside Arizona who spend less than nine months of the tax year in the state are generally considered nonresidents.
Nonresidents are taxed only on income derived from Arizona sources, such as wages, rental income, or business profits generated within the state. Residents, by contrast, are taxed on their worldwide income. Understanding this distinction ensures nonresidents accurately assess their tax liabilities and pay only on income subject to Arizona taxation.
Thresholds for Filing
Nonresidents must file an Arizona state tax return if their gross income from Arizona sources meets or exceeds specific thresholds, which are updated annually. For 2024, a single nonresident must file if their Arizona-sourced income is $12,950 or more.
Income contributing to these thresholds includes wages earned in Arizona, rental income from Arizona properties, and business income generated within the state. If a nonresident’s Arizona income is subject to withholding, such as wages from an Arizona job, filing a return is required to reconcile withheld taxes with actual liabilities. This ensures any overpayment is refunded, or any underpayment addressed.
Income Sources Subject to Arizona Tax
Nonresidents earning income from Arizona must understand which income sources are subject to taxation. Several categories of income are specified under Arizona tax law.
Rental or Real Estate Earnings
Rental income from Arizona properties is taxable for nonresidents. This includes residential, commercial, and vacation rentals. Arizona law considers rental income Arizona-sourced if the property is physically located in the state. Nonresidents must report gross rental income and may deduct allowable expenses like mortgage interest, property taxes, and maintenance. For instance, if a nonresident earns $20,000 in rental income and incurs $5,000 in deductible expenses, $15,000 is taxable.
Business Income
Nonresidents conducting business in Arizona must report income from activities within the state. Business income is taxable if attributable to Arizona operations. Nonresidents allocate income based on the proportion of business activity conducted in Arizona, using apportionment formulas. For example, if a business generates $100,000 in total income, with 30% of sales, payroll, and property in Arizona, $30,000 is taxable.
Capital Gains
Capital gains from the sale of Arizona-based assets are taxable for nonresidents. This includes gains from real estate, stocks, or other investments with a situs in Arizona. Gains are calculated by subtracting the asset’s adjusted basis from the sale price. For example, if a nonresident sells an Arizona property for $300,000 with an adjusted basis of $200,000, the $100,000 gain is taxable.
Other Income
Wages, commissions, and specific types of interest and dividends derived from Arizona sources are taxable for nonresidents. Wages earned in Arizona are taxable regardless of the nonresident’s primary residence. Commissions from sales or services performed in Arizona are also taxable. Interest and dividends are generally exempt unless derived from Arizona-based sources, such as a business operating in the state.
Allocation of Income
Allocating income requires nonresidents to separate Arizona-sourced income from income earned elsewhere. This ensures only income attributable to Arizona is taxed. Nonresidents must use allocation methods, often guided by apportionment formulas considering sales, property, and payroll within Arizona.
For businesses operating across multiple states, income allocation involves calculating the ratio of Arizona sales to total sales, as well as the proportion of payroll and property situated in Arizona compared to overall business holdings.
Filing Procedures
Nonresidents must use Form 140NR, the Arizona Nonresident Personal Income Tax Return, to report Arizona-sourced income. The filing deadline typically matches the federal deadline, April 15, unless it falls on a weekend or holiday. Extensions can be requested using Form 204, granting six additional months to file, though taxes owed must still be paid by the original deadline to avoid penalties.
Form 140NR requires documentation of all Arizona-sourced income, including wages, rental earnings, and business profits, while excluding income from other states. Nonresidents calculate their Arizona Adjusted Gross Income (AGI) by applying allocation and apportionment rules. They should also review credits, such as the Credit for Taxes Paid to Another State, to avoid double taxation. Filing electronically through AZTaxes.gov is recommended to streamline the process and reduce errors.
Penalties for Noncompliance
Noncompliance with Arizona’s nonresident tax filing requirements can result in financial and legal consequences. Late filing incurs a penalty of 4.5% of the unpaid tax per month, capped at 25%, while late payment incurs a 0.5% monthly penalty, also up to 25%. These penalties are assessed concurrently, meaning a taxpayer filing and paying late could face a combined penalty of 5% per month. Interest also accrues on unpaid taxes at the federal short-term rate plus 3%, compounded annually.
Failure to file altogether may result in more severe penalties, including potential criminal charges for tax evasion. Arizona enforces compliance through audits and information-sharing agreements with the IRS and other states. For example, if a nonresident earns Arizona wages reported on a W-2 but fails to file a state return, the Department of Revenue may identify the discrepancy and initiate an audit. Nonresidents should consult a tax professional to ensure accurate and timely filing. In cases of genuine error or financial hardship, penalty abatement or payment plans can be requested by contacting the Arizona Department of Revenue.