Arkansas for retirees: Social Security untaxed, a $6,000 exclusion for the rest

Arkansas is not a state that leaves retirement income alone, and it is not a state that taxes all of it. Social Security, Railroad Retirement, VA benefits and military retirement pay are exempt in full, at any income. Everything else, a pension, a 401(k), a 403(b), a traditional IRA, a government pension, is taxed above a $6,000 exclusion per taxpayer, so a couple with two pensions keeps $12,000 out of Arkansas income and a widow with one pension keeps $6,000. The IRA half of the exclusion has an age test, 59½, and the employer-plan half does not. What is left is taxed at the regular brackets, 3.7% once net taxable income passes about $26,400, less the standard deduction and the $29 credits, with an extra $29 for each spouse 65 or older. Interest, dividends and rent are taxed like wages; long-term capital gains are taxed on half. A Roth conversion is an IRA distribution and costs about 3.7% of whatever exceeds the exclusion. And the $6,000 federal senior deduction, like every other federal below-the-line deduction, never reaches the Arkansas return, because Arkansas does not start from federal taxable income.

The practical result is a low bill rather than no bill. A retired couple living on Social Security and $40,000 of pensions owes Arkansas a few hundred dollars. The same couple with a $200,000 pension owes about $6,800. The planning questions are where the $6,000 goes, whether to use status 4, and what a conversion costs while you live here.

What is exempt outright

Social Security benefits are never on the Arkansas return. The AR1000F instructions list Social Security, Railroad Retirement, VA benefits and workers’ compensation as exempt, with no income test; whether the federal return taxes 0%, 50% or 85% of your benefit makes no difference here. Military retirement pay has been fully exempt since 2018: the gross amount is entered on line 17 and then left out. Active-duty pay has been exempt since 2014. A private railroad pension reported on a 1099-R is not Railroad Retirement and gets only the $6,000 exclusion.

One interaction matters to military retirees. If your exempt military retirement is more than $6,000, you cannot also take the $6,000 exclusion against a civilian pension or IRA. If it is less than $6,000, the unused part of the $6,000 can be applied to your other retirement income.

The $6,000 exclusion

The exclusion is per taxpayer, not per account or per pension. Two pensions paid to one person share one $6,000.

Early IRA withdrawals are the trap. Money taken from a traditional IRA before 59½ for medical bills, education or a first home escapes the federal penalty but does not qualify for the Arkansas exclusion, and Arkansas adds a penalty of its own: 10% of whatever the federal Form 5329 penalty is, on line 32. An employer-plan distribution has no age test, so a 57-year-old drawing a pension under an early-retirement window excludes the first $6,000 while a 57-year-old drawing from an IRA excludes nothing.

A taxpayer 65 or older who does not claim the exclusion at all can check the “65 Special” box on line 7 for an extra $29 credit. That is rarely the better choice, since $6,000 excluded at even the 2% bracket is worth $120, but it exists for the retiree whose only retirement income is Social Security or military pay.

Roth conversions

A conversion from a traditional IRA to a Roth is a distribution, reported on the 1099-R, and Arkansas taxes it as one. If you are 59½ or older and have not used your $6,000 on other IRA or pension income, the first $6,000 of the conversion is excluded; the rest is taxed at the regular brackets. For someone already in the top bracket that is 3.7%, so a $50,000 conversion costs about $1,850 of Arkansas tax, or $1,628 if the exclusion is still available. Conversions before 59½ get no exclusion but no Arkansas penalty either, since there is no federal penalty on a conversion to copy.

Three things follow. First, a conversion is cheaper here than in most of the rest of your tax life, because 3.7% is the ceiling; the federal bracket you land in matters far more than the state. Second, because Arkansas computes tax on each spouse’s column under status 4, a conversion by the lower-income spouse runs through that spouse’s own 0%, 2%, 3% and 3.4% brackets first, worth up to about $367 against a flat 3.7%. Third, the federal consequences, more Social Security taxed, a higher Medicare premium two years later through IRMAA, are the same in Arkansas as anywhere; the state return does not change them. See IRMAA and Roth IRAs.

The federal senior deduction stops at the federal return

The $6,000 per-person federal deduction for people 65 and older, in effect for 2025 through 2028, is a deduction from federal adjusted gross income on the way to federal taxable income. Arkansas uses neither number. The AR1000F builds its own income from the source documents, takes its own adjustments and its own standard or itemized deduction, and never looks at the federal Form 1040 below line 11. There is no Arkansas add-back because nothing was ever taken out. The same is true of the extra federal standard deduction for age.

What Arkansas gives for age is smaller and different: the additional $29 personal credit for each taxpayer or spouse who is 65 on January 1, the “65 Special” $29 for a senior who does not use the exclusion, and the exclusion itself. A couple both over 65 claims four $29 credits, $116, before any dependents.

Capital gains and the brokerage account

Retirees who live partly on a taxable brokerage account get Arkansas’s best break after the Social Security exemption. Schedule AR1000D excludes half of the net long-term capital gain, so the effective top rate on a long-term gain is 1.85%, and gain above $10 million is exempt in full. Short-term gains, interest, dividends and the taxable part of a nonqualified annuity are taxed at the regular rates. The sale of a home is excluded up to $250,000, or $500,000 for a married couple filing on the same return, on the same two-of-five-years test as federal. Mutual fund capital gain distributions are long-term gains and qualify for the half-off. Required minimum distributions are IRA distributions and get only the $6,000.

Relief outside the income tax

Arkansas has no senior income-tax credit, no renter credit and no property tax circuit breaker on the return. Property tax relief is handled by the county assessor and collector under Amendment 79, and it reaches every homeowner, with two pieces reserved for people 65 or older or disabled.

None of this is claimed on the AR1000F. The credit and the freeze both require registration with the county assessor, and a retiree who moves to a new house must register the new homestead; the old freeze does not follow.

Moving in, moving out

Federal law bars any state from taxing retirement income of someone who no longer lives there, so a pension earned in another state and paid to a new Arkansas resident is taxed only by Arkansas, above the $6,000, and an Arkansas pension paid to someone who has moved away is taxed only by the new state. Pension and IRA payments are allocated to the state of residence on the date each payment was received. The move-year return is Form AR1000NR, which computes tax on the whole year and prorates it by the Arkansas share, and the exclusion is taken on the Arkansas-source column. Which state has the right to tax you is the subject of Moving to Arkansas.

Withholding and estimated payments

Pension payers and IRA custodians will withhold Arkansas tax if you ask; many do not by default. A couple living on Social Security and modest pensions usually owes a few hundred dollars and can simply pay with the return. Once expected tax after withholding and credits reaches $1,000, Arkansas wants estimated payments on Form AR1000ES or through ATAP, due April 15, June 15, September 15 and January 15, with a 10% underpayment penalty unless withholding covers 90% of this year’s tax or 100% of last year’s. The retirees who need to watch this are the ones with a large conversion, a large gain or a large brokerage account.