Is Social Security Taxable in Arizona?

Retirees often ask whether their Social Security benefits will be taxed in Arizona. The answer is no; Arizona does not impose a state income tax on Social Security benefits. While this state-level exemption is a financial benefit, it does not extend to the federal level, where tax obligations may still exist depending on a retiree’s overall income.

Arizona’s State Tax Exemption for Social Security

Arizona law provides a complete, 100% exemption for Social Security retirement benefits. This exemption applies to all taxpayers in the state, regardless of their total income, meaning no portion of your Social Security is subject to Arizona’s income tax.

The process for claiming this exemption is straightforward for residents filing state income tax returns. Arizona uses the federal adjusted gross income (AGI) as the starting point for calculating state taxable income. To exclude Social Security, you subtract the total amount of federally taxable Social Security benefits from your Arizona AGI. This action ensures your benefits are not taxed at the state level.

Federal Income Tax on Social Security Benefits

While Arizona provides a full exemption, the federal government’s rules are different and depend on your income. The Internal Revenue Service (IRS) uses a calculation based on your “provisional income” to determine if a portion of your benefits is taxable. You can determine your provisional income by adding your adjusted gross income, any nontaxable interest, and one-half of your total Social Security benefits for the year.

Once you calculate your provisional income, you must compare it to federal thresholds. For an individual filer, if your provisional income is between $25,000 and $34,000, you may have to pay federal income tax on up to 50% of your benefits. If your provisional income exceeds $34,000, up to 85% of your benefits could be subject to federal income tax.

For those who are married and filing a joint tax return, the income thresholds are different. If your provisional income is between $32,000 and $44,000, you may be taxed on up to 50% of your benefits. For joint filers with a provisional income of more than $44,000, the taxable portion can go up to 85%. These federal income thresholds are not indexed for inflation.

Tax Rules for Other Retirement Income in Arizona

Beyond Social Security, Arizona has specific tax rules for other common sources of retirement income. Withdrawals from traditional retirement savings accounts, such as 401(k)s, 403(b)s, and traditional IRAs, are fully taxable. These distributions are treated as ordinary income and are subject to Arizona’s flat 2.5% income tax rate.

Income from most private and out-of-state government pensions is also taxable in Arizona. However, the state offers a tax break for certain pension income. Retirees receiving benefits from U.S. government civil service pensions, the Arizona State Retirement System, or local Arizona government pensions can subtract up to $2,500 of this income from their Arizona AGI.

A benefit exists for military retirees, as Arizona provides a full tax exemption for retirement pay received from the U.S. uniformed services. This means that benefits, annuities, and pensions classified as retired or retainer pay from any branch of the U.S. military are completely subtractable on the Arizona state tax return.