Mostly taxed
How Arizona taxes retirement income
Arizona taxes most retirement income, but at a flat 2.5%, one of the lowest rates of any state with an income tax. Social Security is not taxed.
Public pensions get a small break. Each person can subtract up to $2,500 of pension income from the Arizona State Retirement System, the Public Safety Personnel Retirement System, the Corrections Officer Retirement Plan, a county, city or town plan, a university or community college optional retirement program, or a federal civil service pension. A married couple who both have such pensions can each subtract $2,500. Military retired pay has its own, separate subtraction.
Company pensions and withdrawals from 401(k), 403(b), 457(b) and IRA accounts are taxed at the 2.5% rate. On a $40,000 ASRS pension, the tax is about 2.5% of $37,500, or roughly $940 a year, before other deductions.
Questions
Does Arizona tax ASRS pensions?
Yes, except for the first $2,500 per person, which is subtracted.
Does Arizona tax pensions from another state?
Yes. The $2,500 subtraction covers Arizona public plans and federal pensions only, so another state’s pension is fully taxable at 2.5%.
Does Arizona tax Social Security?
No.