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Arizona Retirement Tax Friendliness

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Overview of Arizona Retirement Tax Friendliness

Arizona does not tax Social Security retirement benefits. The state does, however, tax other types of retirement income, like distributions from an IRA or a 401(k). Arizona’s property taxes are relatively low but sales taxes are fairly high.

This calculator reflects the changes under the 2018 Trump Tax Plan.
Click here to learn more about how the Trump Tax Plan will affect you.

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You will pay of Arizona state taxes on your pre-tax income of
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Quick Guide to Retirement Income Taxes
is toward retirees.
Social Security income is taxed.
Withdrawals from retirement accounts are taxed.
Wages are taxed at normal rates, and your marginal state tax rate is %.
  • Our Tax Expert

    Jennifer Mansfield, CPA Tax

    Jennifer Mansfield, CPA, JD/LLM-Tax, is a Certified Public Accountant with more than 30 years of experience providing tax advice. SmartAsset’s tax expert has a degree in Accounting and Business/Management from the University of Wyoming, as well as both a Masters in Tax Laws and a Juris Doctorate from Georgetown University Law Center. Jennifer has mostly worked in public accounting firms, including Ernst & Young and Deloitte. She is passionate about helping provide people and businesses with valuable accounting and tax advice to allow them to prosper financially. Jennifer lives in Arizona and was recently named to the Greater Tucson Leadership Program.

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Arizona Retirement Taxes

Photo credit: ©iStock.com/omersukrugoksu

Arizona is a popular destination for seniors who want to relocate upon retirement. It has as much sunshine as any state in the U.S. and many of the amenities and attractions that appeal to seniors. When it comes to taxes, it turns out the Grand Canyon state is a good but not great choice for retirees.

Social Security is not taxed at the state level in Arizona but other forms of retirement income, including distributions from retirement savings accounts, are. While Arizona’s property taxes are relatively low, sales taxes are fairly high. Read on to learn more about how retirees fare under Arizona’s tax system.

Is Arizona tax-friendly for retirees?

Arizona is moderately tax-friendly for retirees. Like most U.S. states, it does not tax Social Security retirement benefits. However, other types of retirement income are taxed, either partially or fully. Distributions from retirement savings accounts like a 401(k) or IRA is taxed as regular income, while income from a pension is eligible for a deduction. Arizona’s average state and local sales tax rate is 8.25%. The average effective property tax rate is 0.77%.

Is Social Security taxable in Arizona?

No. The state of Arizona does not tax Social Security retirement benefits. They may still incur taxes at the federal level, however.

Are other forms of retirement income taxable in Arizona?

Yes. Income from retirement savings accounts like a 403(b) or a 401(k) is taxed as regular income by the state of Arizona. It should be combined with income from other sources like wages or salaries as part of your total income. Tax rates range from 2.59% to 4.54% (see the full bracket below).

Income from pensions is also taxed as regular income. U.S. government civil service pension income and Arizona state or local pension income are all eligible for a deduction of $2,500 annually. Private pensions and pensions from states other than Arizona cannot receive this deduction.

Income Tax Brackets

Single Filers
Arizona Taxable IncomeRate
$0 - $10,1792.59%
$10,179 - $25,4452.88%
$25,445 - $50,8903.36%
$50,890 - $152,6684.24%
$152,668+4.54%
Married, Filing Jointly
Arizona Taxable IncomeRate
$0 - $20,3252.59%
$20,325 - $50,8122.88%
$50,812 - $101,6233.36%
$101,623 - $304,8684.24%
$304,868+4.54%
Married, Filing Separately
Arizona Taxable IncomeRate
$0 - $10,1632.59%
$10,163 - $25,4062.88%
$25,406 - $50,8123.36%
$50,812 - $152,4344.24%
$152,434+4.54%
Head of Household
Arizona Taxable IncomeRate
$0 - $20,3252.59%
$20,325 - $50,8122.88%
$50,812 - $101,6233.36%
$101,623 - $304,8684.24%
$304,868+4.54%

How high are property taxes in Arizona?

Arizona’s property taxes are relatively low. Homeowners face a median annual property tax bill of $1,367. That’s about $800 less than the national median and one reason housing costs in Arizona are below average. Housing, which is the single largest expense for seniors, costs about 2% less than the national average in Arizona.

What is the Arizona property valuation freeze?

The property valuation freeze is a form of property tax relief available to homeowners in Arizona with total income below a certain level. It freezes a home’s value for property tax purposes, which in turn limits any potential increases in annual property taxes.

For individual owners, the income level is $35,184. For properties owned by two or more persons, the income level is $43,980. To be eligible, the property must be the owners' primary residence and they must have lived there at least two years.

Seniors who are 70 or older may be eligible to defer payment of their property taxes on their principal residence entirely. To be eligible for deferment, they must have lived in their home for six years or in the state of Arizona for 10 years. They must also have a total taxable income (among all inhabitants) of no more than $10,000.

Photo credit: ©iStock.com/ImagineGolf

How high are sales taxes in Arizona?

Fairly high. The state sales tax rate is 5.6%. Additionally, there are local sales tax rates that average 2.65%. That means a retiree living in Arizona will pay a total sales tax of 8.25%, on average.

Food is a major expense for seniors, but Arizona doesn't tax the sale of groceries. Likewise, prescription drug sales are exempt from sales taxes in the state.

What other Arizona taxes should I be concerned about?

None. The Arizona state government does not impose an estate or inheritance tax, so retirees who wish to pass some of their property or wealth to loved ones do not need to worry.

Most Tax Friendly Places for Retirees

SmartAsset’s interactive map highlights the places in the country with tax policies that are most favorable to retirees. Zoom between states and the national map to see the most tax-friendly places in each area of the country.

Highest
Lowest
Rank City Income Tax Paid Property Tax Rate Sales Tax Paid Fuel Tax Paid Social Security Taxed?

Methodology Our study aims to find the areas with the most tax-friendly policies for retirees. To do that we looked at how the tax policies of each city would impact a retiree with a $50,000 income. Our hypothetical retiree is getting $15,000 from Social Security benefits, $10,000 from a private pension, $15,000 from retirement savings like a 401(k) or IRA and $10,000 in wages.

To calculate the expected income tax this person would pay in each location we applied deductions and exemptions. This included the standard deduction, personal exemption and deductions for each specific type of retirement income. We then calculated how much this person would pay in income tax at the federal, state, county and local levels.

We calculated the effective property tax rate by dividing median property tax paid by median home value for each city.

In order to determine sales tax burden we estimated that 35% of take-home (after-tax) pay is spent on taxable goods. We multiplied the average sales tax rate for a city by the household income less income tax. This product is then multiplied by 35% to estimate the sales tax paid.

For fuel taxes, we first distributed statewide vehicle miles traveled down to the city level using the number of vehicles in each county. We then calculated miles driven per capita in each city. Using the nationwide average fuel economy, we calculated the average gallons of gas used per capita in each city and multiplied that by the fuel tax.

For each city we determined whether or not Social Security income was taxable.

Finally, we created an overall index weighted to best capture the taxes that most affect retirees. We gave a 4x weighting to income tax, 3x weighting to property tax rate, a 2x weighting to sales tax and 1x weighting to fuel tax.

Sources: Internal Revenue Service, Social Security Administration, state websites, local government websites, US Census Bureau 2016 American Community Survey, Avalara, American Petroleum Institute, GasBuddy, UMTRI, Federal Highway Administration