Arizona for retirees: Social Security and military pay untaxed, pensions and IRAs at 2.5%

Arizona is a half-exempt state for retirees. Social Security and Railroad Retirement benefits come off the return in full, at any age and any income, and so does every dollar of military retired pay. Beyond that the exemptions are small: $2,500 of a federal, state or local government pension, a $2,100 exemption for each spouse 65 or older, and, for 2025 through 2028, a subtraction equal to the federal senior deduction of up to $6,000 a person. A private pension, a traditional IRA or 401(k) withdrawal, an annuity, an inherited IRA and a Roth conversion are all taxed at 2.5%. That rate is low enough that most retirees owe modest amounts, but it is not zero, and anyone who moves here expecting their pension to be untaxed will be surprised in April. The other half of the Arizona story is outside the income tax: a property value freeze for owners 65 and older, a constitutional cap on primary residence taxes, and a refundable credit of up to $502 for low-income seniors, renters included.

What comes off, and what stays in

Arizona subtracts the federally taxable amount, not the gross. If $34,000 of a $40,000 Social Security benefit is taxed federally, $34,000 is in AGI and $34,000 comes off. There is no Arizona penalty on early withdrawals; the federal 10% penalty is the only one.

The government pension subtraction is modest and specific. It covers the U.S. Government Service Retirement and Disability Fund, the U.S. Foreign Service, the Arizona State Retirement System and the retirement plans of Arizona’s cities, counties and towns, and it is limited to $2,500 per taxpayer, so a couple each drawing an ASRS pension subtracts $5,000 and a widow drawing both her own and a survivor pension still subtracts $2,500. A pension from another state’s government or from a private employer does not qualify. Military retired pay used to run through this $2,500 limit; since 2021 it is fully exempt on its own line.

The age-65 exemption and the federal senior deduction

Arizona has no personal exemption, but it allows $2,100 for each taxpayer or spouse who is 65 or older by year-end (2025 line 38), plus $1,500 for each who is blind. The exemption is a deduction, so at 2.5% it is worth $52.50 a person. It stacks on top of the standard deduction, which for 2025 was $31,500 joint and $15,750 single and for 2026 should match the federal $32,200 and $16,100 (to come). Arizona does not have the extra standard deduction for age that the federal return has; the $2,100 is its version.

What is new is that the federal senior deduction now counts here too. The July 2025 federal law gives each person 65 or older a $6,000 deduction for 2025 through 2028, phased out at 6% of modified AGI above $75,000 single or $150,000 joint. That deduction sits below the AGI line federally, so it would not reach a return that starts from AGI. Arizona’s conformity law, HB 4168, added a subtraction equal to the amount deducted under the federal provision, retroactive to 2025. The result for a 67-year-old couple with $120,000 of income is $12,000 off the Arizona return, worth $300 at 2.5%. The phase-out travels with it: a couple at $170,000 of modified AGI gets $4,800 each federally and the same here. On the 2025 return it ran through the Middle Class Tax Cuts Package worksheet to the Other Subtractions line; the 2026 placement is to come. It was not available on the short forms 140A and 140EZ.

Roth conversions

A Roth conversion is a taxable traditional IRA distribution, and Arizona taxes it at 2.5% with no subtraction. Converting $100,000 costs $2,500 of Arizona tax on top of the federal bill, which is a small price next to most states, and still a price. Because the state rate is flat, there is no Arizona bracket to manage; the planning is federal. The converted amount raises federal AGI, which can make more Social Security taxable, raise Medicare premiums two years later through IRMAA, and eat into the $6,000 senior deduction above $75,000 or $150,000 of modified AGI, which in turn raises the Arizona bill because the Arizona subtraction shrinks with the federal one. See Roth IRAs and the backdoor Roth and IRMAA.

A retiree who plans to leave Arizona for a state with no income tax might defer conversions until after the move; one who is coming to Arizona from a high-tax state might do them after arriving. Neither move changes the federal tax.

Withholding and estimated payments

Pension payers and IRA custodians will withhold Arizona tax if asked on Form A-4P; many do not withhold by default. Social Security has no Arizona tax to withhold. A retiree whose income is mostly pensions and IRA withdrawals should either set state withholding on the largest payment or make estimated payments, because the rule is mechanical: estimates are required when Arizona gross income (federal AGI for a resident) exceeds $75,000 single or $150,000 joint in both the prior and current year, and the safe harbor is 90% of this year’s tax or 100% of last year’s. Below those thresholds there is no requirement, but a balance due in April still draws interest. Payments go on Form 140ES or at AZTaxes.gov. See Estimated payments.

Relief outside the income tax

Arizona has no general homestead exemption, and the help it gives older homeowners runs through the county assessor and the state constitution rather than Form 140. One piece, the property tax credit, is on the return.

The Senior Freeze income test counts Social Security and veterans’ disability payments in full, even though the income tax ignores them. The freeze holds the value, not the bill; if the taxing districts raise rates, the tax rises. The 140PTC income limits are not indexed and have not moved in years, so the credit reaches only the poorest households.

The Senior Freeze is the one worth the paperwork. It is applied for once, with three years of 1040s or SSA-1099s for every owner on title, and renewed every three years. Each county assessor runs it with the same statewide limits. Miss the September 1 deadline and the freeze starts the following year.

Moving in, moving out

Federal law bars a state from taxing the retirement income of someone who no longer lives there, so a pension earned elsewhere and paid to a new Arizona resident is Arizona’s to tax, at 2.5%, from the day of arrival. A retiree who leaves Arizona stops owing Arizona on pension and IRA income the day residency ends, and the new state’s rules take over. In the year of the move the part-year return, Form 140PY, picks up retirement payments received while a resident and prorates the standard deduction and age exemption by the share of the year’s income that is Arizona’s. Social Security is subtracted whether received before or after the move. The residency tests, and what the former state will look at, are in Moving to Arizona.