Arizona stands out among states by allowing taxpayers to deduct **100% of qualifying medical and dental expenses**, uncapped by any AGI threshold. While federally you must clear the 7.5% AGI hurdle before deducting these expenses, Arizona lets you deduct **every dollar** of unreimbursed, after-tax medical expenses if you choose to itemize on your state return. Here’s a deep dive into how this works and why it matters in 2025.
✅ Arizona’s Generous Medical Deduction Rule
Under Arizona Revised Statutes § 43‑1042(B), Arizona taxpayers who itemize may deduct the ***entire*** amount of their unreimbursed medical expenses, without reducing them by a percentage of AGI :contentReference[oaicite:0]{index=0}. This contrasts sharply with the federal rule, where only expenses exceeding 7.5% of AGI can be deducted.
That means if you spent $10,000 on qualifying medical expenses and pay them out-of-pocket, Arizona lets you deduct the full $10,000—regardless of your income—so long as you itemize.
📝 Who Can Deduct?
To claim this deduction:
- You must file an Arizona Form 140 and **opt to itemize** via Arizona’s Schedule A.
- You don’t need to itemize federally—Arizona allows itemizing **even if** you took the federal standard deduction :contentReference[oaicite:1]{index=1}.
- Only **unreimbursed, after-tax** expenses qualify—exclude amounts paid or reimbursed by insurance, employer pre-tax plans, HSAs, or FSAs :contentReference[oaicite:2]{index=2}.
🚫 Expenses That Don’t Qualify
If an expense was paid with pre-tax dollars or reimbursed (through employer plans, HSAs, FSAs, or insurance), it cannot be deducted. Those items must be excluded from your state Schedule A entries :contentReference[oaicite:3]{index=3}.
📑 How to Claim on Your State Return
- Complete federal Form 1040 Schedule A (if possible), even if taking the standard deduction.
- On Arizona Form 140 Schedule A, enter your **total unreimbursed medical expenses** on lines 1–4—no AGI reduction required :contentReference[oaicite:4]{index=4}.
- Include the result on Form 140, Page 2, Line 43.
💡 Why This Matters in 2025
- Full Splash Benefit: Every dollar of expense reduces your Colorado AGI directly, potentially saving you more than federally.
- Itemizing Despite Federal Standard Deduction: Even if the federal Schedule A isn’t worth it, you can still itemize in Arizona solely to claim medical expenses.
- Lower Income Doesn’t Matter: No AGI threshold means even modest income taxpayers can benefit.
🔍 Sample Scenario
Example: You have $8,000 in unreimbursed medical expenses and take the federal standard deduction. In Arizona:
- You itemize on Arizona Schedule A and deduct the full $8,000.
- Your taxable income drops by $8,000—no thresholds or phaseouts to deal with.
- If you had taken federal itemized deductions, only the amount above 7.5% of AGI (e.g., $6,000 for $80,000 AGI) would have been deductible federally.
🧾 Documentation Best Practices
To support your deduction in case of audit, keep:
- Detailed provider invoices and bills
- Proof of payments (cancelled checks, credit statements)
- Insurance EOBs showing out-of-pocket amounts
- Documentation proving these were **not paid or reimbursed pre-tax**
📈 Arizona vs. Federal: Quick Comparison
| Feature | Federal | Arizona |
|---|---|---|
| AGI Threshold | 7.5% (only excess deductible) | None—full deduction allowed |
| Itemize Requirement | Must itemize federally | Must itemize on AZ return; federal not required |
| Reimbursements/Pre-tax Payments | Deduction limited to unreimbursed, after-tax amounts | Same restriction applies |
✅ Final Takeaway
Arizona’s unlimited medical expense deduction represents a rare opportunity for taxpayers—especially those with large healthcare bills or modest income. By itemizing solely on your state return, you can tap into this benefit even if federal itemizing isn’t beneficial.
Just make sure to exclude reimbursed or pre-tax expenses, document carefully, and submit the Arizona Schedule A with Form 140. With proper planning, you can significantly lower your state tax bill in 2025 by taking full advantage of this generous deduction opportunity.
