With notably low taxes on working and retirement income, and no estate or inheritance tax, Arizona is one of the more tax-friendly states for older workers and retirees.
This filing season, Arizona adopted a flat income tax rate of 2.5 percent that starts with the 2023 tax year.
The big picture:
- Income tax: 2.5 percent
Arizona consolidated its four income tax brackets into two brackets in 2022. New for the 2023 tax year, Arizona has a flat income tax rate of 2.5 percent.
- Property tax: .63 percent of a home’s assessed value (average)
Arizona’s average property tax rate ranks as the 11th lowest in the country, with property owners paying an average of 0.63 percent of a home’s assessed value, according to the Tax Foundation. Average rates vary by county, ranging from $3.90 per $100 assessed value in Greenlee County to $13.54 per $100 assessed value in Pima County in 2023.
- Sales tax: 8.37 percent (average combined state and local)
The state sales tax is 5.6 percent, but most counties and cities add a local tax that can raise combined sales tax rates as high as 12 percent or more. The average combined state and local sales tax is 8.37 percent, according to the Tax Foundation.
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How is income taxed in Arizona?
New this filing season, Arizona has a flat income tax rate of 2.5 percent, replacing its graduated rate structure. This means that every Arizona taxpayer, regardless of income level, will pay the same 2.5 percent rate.
Arizona is one of just 11 states with a flat individual income tax structure, and among them, it holds the lowest tax rate.
Arizona residents must file income taxes if they earned more than $13,850 individually or $27,700 if married and filing jointly. Residents filing as head of household must file income taxes if they earned more than $20,800.
Part-time residents are also subject to paying Arizona income tax. A part-time resident is defined as any resident who permanently moves out of the state during the tax year or any nonresident who moves into Arizona and becomes a resident during the tax year. Part-time residents must pay the state’s 2.5 percent income tax rate on all income earned globally during the period they’re an Arizona resident and on all income earned from Arizona sources during the period they were a nonresident.
There are some income tax exemptions, such as retirement pay of the U.S. uniformed services.
Watch the video below to learn how to identify your 2023 federal income tax brackets.
Understanding Your 2023 Income Tax
Are pensions or retirement income taxed in Arizona?
Yes, money withdrawn from pensions and 401(k)s, 403(b)s and IRAs is taxed, with some exceptions, including railroad retirement benefits received under the Railroad Retirement Act and retirement pay from the U.S. armed forces.
Arizona also taxes retirement income received from another state.
The tax rate is 2.5 percent, just like for other income.
Residents who receive U.S. government civil service pensions and Arizona state or local government pensions are eligible for an annual tax deduction of up to $2,500.
AARP's Retirement Calculator can help you determine if you are saving enough to retire when — and how — you want.
What about investment income?
Capital gains are subject to the same taxes as regular income, but some deductions are allowed.
Taxpayers may deduct 25 percent of any long-term capital gain from assets acquired after Dec. 31, 2011. (If you’ve held an asset for more than a year and sell it for a profit, your income is considered a long-term capital gain.)
Taxpayers who’ve earned income on U.S. government bonds may deduct the interest.
Does Arizona tax Social Security benefits?
Arizona doesn’t tax Social Security benefits, but you’ll pay federal taxes on a portion of your benefits if your total income exceeds certain thresholds. Up to 50 percent of your benefits will be taxed if you file an individual tax return and make $25,000 to $34,000 in total income — or if you file jointly and as a couple make $32,000 to $44,000 in total income. Up to 85 percent of your benefits will be taxed by the federal government if your total income is more than $34,000 individually or $44,000 if filing jointly as a couple.
AARP's Social Security Calculator can assist you in determining when to claim and how to maximize your Social Security benefits.
How is property taxed in Arizona?
Property tax in Arizona is a county tax that is based on the value of your home, which is typically assessed by your county assessor.
The average rate property owners pay across Arizona is .63 percent of the assessed value of the home, according to the Tax Foundation. This makes Arizona the state with the 11th lowest effective average property tax rate in the country.
Average property tax rates vary by county. In 2023, tax rates ranged from $3.90 per $100 assessed value in Greenlee County to $13.54 per $100 assessed value in Pima County in 2023, according to the Arizona Department of Revenue.
Residents 65 and older may apply for the state's “Senior Freeze Program,” officially known as the Senior Property Valuation Protection Option. This allows taxpayers who are qualified by age and income to have the valuation of their primary residence fixed (“frozen”) for a renewable period of three years. Learn more about the Senior Property Valuation Protection Option and other property tax exemptions through the Arizona Department of Revenue.
What about sales tax and other taxes?
- Sales and use tax: There’s a 5.6 percent tax, but most counties and cities add a local tax that can raise the combined sales tax rate as high as 12 percent. Arizona’s combined state and average local tax rate of 8.37 percent is the 11th highest in the country, according to the Tax Foundation. Find your county’s tax rate with the Arizona Department of Revenue’s Privilege & Use Tax Rate Look Up tool. Note that Arizona does not tax most groceries or prescription medicines.
- Gas tax: The Arizona fuel tax is 18 cents per gallon. Diesel is taxed at the same rate for light vehicles, but for use in some tractors, large trucks and other vehicles that have more than two axles or weigh more than 26,000 pounds, the rate is 26 cents per gallon.
- Vehicle license tax: You’ll be charged a vehicle license tax as part of the annual fee to register your vehicle. The amount is calculated by first determining an assessed value of your car by taking 60 percent of the car’s base retail price and reducing that total by 16.25 percent for each year since the vehicle was first registered in Arizona (15 percent before Aug. 1, 1998). Using that number, you’re charged $2.80 per $100 of value if the car is new and $2.89 per $100 if it’s used.
- Alcohol taxes: The tax rate for beer is 16 cents per gallon, and the rate for liquor is $3 per gallon. The rate for wine is 84 cents per gallon, unless it contains more than 24 percent alcohol per gallon, which raises the rate to $4 per gallon. Excise taxes are typically paid by the wholesaler, but some or all may be included in the retail price. Alcohol is also subject to state and local sales tax.
- Lottery winnings: The lottery is required by law to withhold 24 percent for federal taxes and 4.8 percent for state income taxes. Winners may be liable for additional or fewer taxes when reported to the IRS.
Will I or my heirs have to pay inheritance or estate tax?
No. Arizona does not have an estate or inheritance tax.
However, any income received after a person dies that’s included in a resident’s federal adjusted gross income is taxable in Arizona. For example, if you inherit a traditional IRA, that money will be taxed. If you inherit an estate or trust that generates income, that income is also subject to Arizona tax.
Are there any tax breaks for older residents?
Yes, Arizona offers several tax break programs for older residents.
For starters, Arizona’s Senior Property Valuation Protection Option allows property owners who meet certain criteria (based on income, age and residency) to freeze the valuation of their property for a three-year period, after which applicants can reapply.
To qualify, the property owner (or one of them, if there are multiple owners) must be 65 or older; the property must be the owner’s primary residence for a minimum of two years; and total annual income from all sources, including from Social Security and veteran’s disability payments, must be less than $45,264 (one owner) or $56,580 (two or more owners), when averaged over the past three years.
To apply, download an application from Arizona’s Department of Revenue website, complete it and return it to your county assessor by Sept. 1, 2024.
Individuals who live in Maricopa County and qualify for the Senior Property Valuation Protection Option will automatically be qualified for the state’s Elderly Assistance Fund, designed to proportionately reduce the primary school district taxes paid by qualified property owners. Find more information in the Department of Revenue’s Property Tax Exemptions publication.
Adults 70 and older who meet certain requirements, including having lived in their current home for six years or in Arizona for 10 years and who have an annual total taxable income of less than $10,000, can defer their property tax payments for one year.
Are military benefits taxed?
Arizona doesn’t tax military retired pay.
Active-duty military pay is also not taxed, nor is pay received for active service as a reservist for the National Guard.
What is the deadline for filing Arizona taxes in 2024?
The deadline for filing in 2024 is April 15, which is also the deadline for federal tax returns. For help estimating your annual income taxes, use AARP's Tax Calculator.
If you need more time to file, you can apply for a six-month extension by using this form. Note that extensions only extend the time you have to file. Taxes owed must still be paid by the original deadline.
Grace Dickinson is a writer for aarp.org who covers federal and state policy. She previously wrote for The Philadelphia Inquirer. Her work has also appeared on sites including HuffPost and Eater.
Also of Interest:
- States With Highest and Lowest Sales Tax Rates
- How to Get Free Tax Help
- Your 2023-2024 Tax Brackets
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