Arizona is moderately tax-friendly for retirees. Social Security income is not taxable. Withdrawals from retirement accounts are fully taxable. With remarkably low taxes on working income and retirees, and no inheritance or inheritance taxes, Arizona is one of the most favorable states for older and retired workers.
Last fiscal season, Arizona adopted a fixed tax rate of 2.5 percent. Arizona taxes most types of retirement income, but its fixed tax rate could help lower your tax bill. Recent legislation has made income tax in North Dakota affordable for many taxpayers. Even for retirement income subject to state income tax, the highest rate you'll pay is 2.5%.
Are Social Security taxes in Arizona? No, Arizona does not tax Social Security benefits. However, even though Social Security isn't taxable in Arizona, you have to pay federal taxes. While Arizona doesn't offer as broad an exemption for family housing as in states like Florida, its combination of lower property taxes, no taxes on Social Security benefits, and diverse housing options can create a strong foundation for an affordable retirement, especially for those who want to explore areas beyond high-demand cities. Mid-year residents are also subject to Arizona tax on any income earned while residing in Arizona, including retirement from another state, and any income earned from an Arizona source before moving (or after leaving) the state. Mid-year residents must exclude income that Arizona law doesn't tax.
Non-residents are subject to Arizona tax on any income earned from Arizona sources. Non-residents can also exclude income that Arizona law doesn't tax. Active-duty military pay is also not taxable, nor is it paid for active duty as a National Guard reservist. Choosing Arizona for retirement means balancing financial benefits with lifestyle considerations, from climate and taxes to health care and housing.
Iowa recently exempted residents age 55 and older from retirement income tax and eliminated their estate tax for tax years 2025 and beyond. If you are eligible to declare married for federal purposes, so are you for Arizona and you must file the return using the state of being married filing a joint return or married filing a separate return. Local taxes can increase retirees' expenses, so accounting for them in your budget is a smart decision. Retirees also benefit from a growing network of age-friendly communities, quality healthcare facilities, and endless opportunities for outdoor recreation, from morning walks in the desert to afternoons on the golf course.
Arizona is popular with seniors who want to move because of its favorable taxes and low cost of living. For now, residents born between 1946 and 1962 can deduct up to 75% of their retirement and pension income for fiscal year 2025. For tax reporting purposes in Arizona, year-round residents calculate their gross income the same way they do to file federal income tax. However, inheritance tax is mostly exempt for linear descendants and ascendants, and 10% for most of others. Health care is a priority for retirees, and Arizona offers strong options, especially in and around major cities.
For those retirees whose premiums are deducted from their ASRS pension, they can check their total health insurance expenses for the previous tax year by logging in to your secure MyASRS account.
