How Much Taxes Are Taken Out in Arizona?

Arizona’s tax system is designed to fund public services through various revenue streams. The state employs a combination of taxes that affect individuals and businesses, including income tax, sales tax, and property tax. While some taxes are levied at the state level, local governments also impose their own rates, leading to variations in the total tax burden depending on location within the state. This structure aims to balance revenue generation with competitive tax rates compared to other states.

Arizona Individual Income Tax

Individuals earning income in Arizona are subject to individual income tax, including both residents and non-residents who derive income from Arizona sources. This encompasses various forms of income such as wages, salaries, business earnings, and capital gains. For the 2024 tax year, Arizona has implemented a flat income tax rate of 2.5% on taxable income, replacing its previous progressive tax bracket system.

To determine taxable income, individuals can utilize deductions and exemptions. Arizona offers a standard deduction, which for 2024 is $14,600 for single filers or married taxpayers filing separately, $29,200 for married couples filing jointly, and $21,900 for those filing as head of household. Taxpayers may also itemize deductions, including medical and dental expenses, mortgage interest, and charitable contributions.

Several types of income are excluded from Arizona’s individual income tax. Social Security benefits are not taxed by the state. Active-duty military pay and military retirement pay also receive a full exemption. Certain government pensions, including those from the U.S. government civil service and Arizona state or local government, may have exemptions up to $2,500.

Filing requirements depend on an individual’s gross income, filing status, and residency. Full-year residents are taxed on all income, including earnings from other states, subject to Arizona’s specific modifications. Part-year residents are taxed on income earned while an Arizona resident and on Arizona-sourced income earned during their non-resident period. The deadline for filing Arizona tax returns is April 15, with extensions available until October 15.

Arizona Sales Tax

Arizona’s sales tax is known as the Transaction Privilege Tax (TPT), levied on vendors for conducting business within the state. This tax is applied to the gross proceeds or gross income derived from various business activities. While it is a tax on the seller, businesses commonly pass this cost on to the consumer, making it function similarly to a sales tax in practice.

The state TPT rate is 5.6%. Local jurisdictions, including cities and counties, impose their own TPT rates, which are added to the state rate. This can result in a combined TPT rate ranging from 5.6% to 11.2%, depending on the specific location where the transaction occurs. Businesses engaged in taxable activities need to obtain a TPT license from the Arizona Department of Revenue and potentially from the cities where they operate.

Many types of transactions and activities are subject to TPT. These include retail sales, contracting, commercial and residential leasing, utilities, and certain services. Starting January 1, 2025, residential rental property owners will no longer collect city TPT on income from long-term lodging stays.

Certain items are exempt from TPT. Most groceries intended for home consumption are exempt, though prepared foods and restaurant meals remain taxable. Prescription drugs and medical devices prescribed by licensed practitioners are also exempt. Other exemptions include machinery and equipment used directly in manufacturing, livestock and feed, and solar energy devices.

Arizona Property Tax

Property tax in Arizona is paid by real estate owners and is assessed at the county level. The valuation process involves determining two values: full cash value and limited property value. Full cash value is synonymous with market value. Limited property value, used for calculating property taxes, is designed to limit annual increases and cannot exceed the full cash value.

County assessors are responsible for identifying, classifying, valuing, and assessing all property in their respective counties according to state law. The most common appraisal methods used for valuation include the market sales comparison approach, the cost approach, and the income approach. The market sales comparison approach is often used for residential properties, while the income approach is suited for properties that generate measurable income, such as apartments.

Property is classified based on its usage, and each class is assigned an assessment ratio. This assessment ratio is applied to the full cash value or limited property value to determine the property’s net assessed value. Tax rates are set by various local entities, including counties, cities, school districts, and special districts.

Property tax bills are calculated by applying these tax rates to the assessed value. There are two types of tax rates: primary rates and secondary rates. Primary rates fund the basic operations of government entities like counties and school districts. Secondary rates are set to cover bonded debt, special district taxes, and voter-approved overrides of statutory tax limits.

Other Arizona Taxes

Arizona also imposes other taxes that contribute to the overall tax landscape. The state levies a corporate income tax on businesses operating within its borders. The corporate income tax rate in Arizona is 4.9% of taxable income. Corporations anticipating an Arizona income tax liability exceeding $1,000 are required to make estimated tax payments throughout the year.

Arizona does not impose a state-level estate tax or inheritance tax. This means that when an individual passes away, their heirs can inherit money and property without incurring state taxes on the inheritance, and the estate itself is not subject to state-level taxation before distribution. Federal estate taxes may still apply to larger estates that exceed certain exemption amounts.

The Vehicle License Tax (VLT) is an annual fee paid during vehicle registration. The VLT is based on the vehicle’s assessed value, which decreases each subsequent year. The VLT rate is applied per $100 of assessed value.

Arizona collects excise taxes on specific goods. There is an excise tax on motor fuel. Tobacco products are also subject to excise taxes. Alcoholic beverages, including liquor, wine, and beer, also have excise taxes applied at the wholesale level, which are typically passed on to the consumer.