Some forms of retirement income are taxable in Arizona but others are tax-free. For example, private and public pensions, distributions from IRAs and other retirement accounts, like the 401(k), are taxable. Annuities are also taxed. However, Social Security benefits and military retirement income are usually not taxable in Arizona.
Consider Also: Do I Have to Pay Taxes on Military Retirement Pay?
AZ Retirement Taxes
Generally speaking, the Arizona state retirement taxes are pretty reasonable. But you also need to realize that the income you earn from other states is usually taxed within Arizona. In addition, your pensions will also be taxed as regular income. That includes the Arizona state and the U.S. government civil service pension.
However, if you are taxed within the state and in another state, you may be eligible for credits for the taxes paid. This puts money back in your pocket, so it’s crucial to find out if you qualify. Also, both federal and Arizona retirement plans are usually eligible for a $2,500 annual tax deduction. But pensions from other states or private ones do not benefit from this kind of deduction.
State Taxes Concerning ASRS
The Arizona State Retirement System (ASRS) is a defined benefit plan qualified under section 401(a) of the Internal Revenue Code. It has been around since 1953.
The system administers benefits and pensions for the Arizona state employees, charter and public school teachers and other political subdivision employees who have elected to participate in the program.
Consider Also: How to Get Social Security Benefits & TRS Benefits
Arizona residents under the ASRS are required to pay state retirement taxes for annual taxable distribution amounts over $2,500. However, nonresidents may not have to pay the state’s taxes even if they live in the state temporarily. And ASRS cannot withhold on behalf of another state’s income tax liability.
Arizona PSPRS and Taxes
The Arizona Public Safety Personnel Retirement System (PSPRS) is another pension plan available for sworn public safety personnel. These include police officers, municipal firefighters and highway patrol employees. The defined benefits plan is also qualified under section 401(a) of the Internal Revenue Code, and it has been in existence since 1968.
For members under the PSPRS benefits plan, benefits are determined based on both their contributions and earnings from those contributions. If you are a retiree on this plan, you will receive a lifelong Arizona retirement income, which is considered taxable income.
However, if you contributed after-tax funds into the system, some of your monthly benefits may be considered nontaxable. In addition, if you receive work-related disability pension benefits, a portion of it may be nontaxable.
Federal Taxes for Arizona Retirees
The IRS considers the ASRS pensions and benefits as taxable revenue. However, the Arizona retirement taxable income among retirees varies.
Contributions made on or after July 1, 1986 to the ASRS will be taxed. As for ASRS benefits, you may elect to claim several allowances so you can withhold an additional amount from each pension check.
For your PSPRS benefits, your federal income taxes will be withheld from your payments based on the taxable portion of your benefits and married with three exemptions. In this case, you will calculate your taxable amount based on the Exclusion Ratio Safe Harbor Method. You can download the Safe Harbor information sheet here.
Consider Also: What Are the Taxes on Pension Benefits?
Best Places to Retire in Arizona on a Budget
Arizona is one of the most tax-friendly places in the country for retirees. Not only does it charge reasonable taxes, but the state also offers plenty of sunshine for sun worshipers.
If you opt to settle in Arizona state in retirement, it would be wise to do so in low-cost areas, especially if your retirement income is low. Some of the most budget-friendly places to retire in include:
- Oro Valley
- Catalina Foothills
- Ahwatukee Foothills
If you want to live in Arizona, it would be wise to do your research and find out which location best suits your needs.
While Arizona taxes some types of retirement incomes, the tax rates are relatively low. For this reason, if you are looking for somewhere to settle in after retirement, the state is worth considering. When you choose to remain in or become a resident of Arizona, you get to enjoy the sunshine too. That’s a win-win all around.
- SmartAsset: Arizona Retirement Tax Friendliness
- AZDOR: Identifying Other Taxable Income
- Kiplinger: Arizona State Tax Guide for Retirees
- ASRS: Employer Manual
- NASRA: Arizona
- AZDOR: Determining Filing Status for Nonresidents, Part-Year Residents and Military
- PSPRS: About Public Safety Personnel Retirement System
- AZ Library: Public Safety Personnel Retirement System (PSPRS)
- PSPRS: Elected Officials Tax Information
- ASRS: Tax Information
- Clever: The 5 Most Affordable Places to Live In Arizona
- Retirable: 10 Best Cities to Retire in Arizona in 2021
I hold a BS in Computer Science and have been a freelance writer since 2011. When I am not writing, I enjoy reading, watching cooking and lifestyle shows, and fantasizing about world travels.