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.
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Arizona Retirement Taxes
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. Property taxes in Arizona won't break the bank, but sales taxes can hit a bit harder.
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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 are taxed as regular income, while income from public pensions may be eligible for a deduction.
Arizona’s state sales tax is 5.6%, while local rates can range up to 10.4%. The effective property tax rate (median property taxes as a percentage of the median home value) is 0.43%.
Is Social Security taxable in Arizona?
The state of Arizona does not tax Social Security retirement benefits. You may incur taxes at the federal level, however.
Are other forms of retirement income taxable in Arizona?
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. Arizona has a flat income tax rate of 2.5% for all tax filers.
Arizona also allows a subtraction of up to $2,500 for U.S. government civil service, military pensions and state or local pension income. Pensions from other states do not qualify. Additionally, Arizona allows a full subtraction for benefits, annuities and pensions received as retired or retainer pay from the uniformed services of the U.S.
How high are property taxes in Arizona?
Arizona’s property taxes are relatively low. Homeowners face a median annual property tax bill of $1,828. That’s almost $1,400 less than the national median and is one reason why housing costs in Arizona are below average.
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. Income levels may vary by county.
In Maricopa County, for example, the income level for individual owners is $46,416. And for properties owned by two or more persons, the 2025 income level is $58,020. To be eligible, the property must be the owners' primary residence and they must have lived there at least two years.
Additionally, eligible seniors could defer payment of their property taxes on their principal residence entirely. To be eligible for deferment, they must comply with specific requirements, including an assessed property value maximum and a household income limit.
How high are sales taxes in Arizona?
The state sales tax rate is 5.6%, which is fairly normal. However, local sales tax can range up to 10.4%.
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?
The Arizona state government does not impose an estate tax 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.
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 2014 American Community Survey, Avalara, American Petroleum Institute, GasBuddy, UMTRI, Federal Highway Administration
