Arizona Retirement – Tax-Friendly Affordable Living & Senior Perks
Arizona Offers Retirees Low Taxes, Warm Weather and Affordable Living. In this video, FinStream TV Co-Founder Bob Powell interviews Erin Itkoe, CPA/PFS, CFP about retiring in Arizona. Arizona remains one of the top destinations for retirees — whether they relocate permanently or spend part of the year as “snowbirds.” The state’s appeal includes sunny weather, access to outdoor recreation and vibrant communities that support an active retirement lifestyle.
Another major draw is the relatively low cost of living. Housing is moderately priced, transportation costs are reasonable, and food expenses are generally affordable — helping retirees stretch their budgets further.
Financial professionals often point to Arizona’s tax structure as a key benefit for retirees. The state offers low taxes on retirement income and does not impose estate or inheritance taxes. For retirees with substantial assets or those drawing down retirement accounts, this can lead to meaningful long-term savings.
Arizona’s tax system aligns well with the needs of retirees, according to Erin Itkoe, CPA/PFS, CFP, director of financial planning at Tarbox Family Office in Scottsdale.
Flat Tax and Favorable Income Rules
In 2024, Arizona implemented a flat income tax rate of 2.5%, replacing its previous tiered system, according to Itkoe, who serves in multiple roles with the American Institute of Certified Public Accountants, including on its Personal Financial Planning Executive Committee, Tax & PFP Integration Task Force, and as chair of the PFP Champions Task Force.
This rate applies evenly across most income types — including wages, investments, pensions and retirement account withdrawals — making it among the lowest flat tax rates in the country.
Arizona’s tax treatment of retirement income includes the following:
Distributions from IRAs, 401(k)s, and other retirement accounts are fully taxable.
Private pension income is also taxed.
Public pensions from Arizona or the federal government are eligible for a $2,500 annual deduction.
Military retirement pay is fully exempt.
Social Security benefits are not taxed by the state, though they may be subject to federal taxes.
Railroad Retirement Benefits are partially taxed — Tier I benefits are exempt, while Tier II benefits are subject to state tax.
Investment income and long-term capital gains are taxed at 2.5%, with a 25% deduction allowed on gains from assets acquired after Dec. 31, 2011.
Interest on U.S. government bonds is exempt.
Arizona does not levy a Medicare surtax.
Sales and Property Tax Overview
Arizona has a base state sales tax rate of 5.6%, but local jurisdictions can raise the total rate to as high as 11.2% in some areas. Most physical goods are taxable, though groceries and prescription medications are typically exempt.
The state’s average effective property tax rate is 0.44%, placing it among the lowest in the country. This is especially helpful for retirees seeking long-term housing affordability.
Arizona also offers a Senior Property Valuation Protection Program, often referred to as the “Senior Freeze.” This program allows qualifying homeowners age 65 and older to lock in the assessed value of their primary residence, shielding them from property tax increases driven by rising home prices. The program has income and residency requirements and must be renewed every three years.
A Retirement-Friendly Climate — Financially and Otherwise
Arizona continues to appeal to retirees not just for its weather and amenities, but for its manageable tax burden. Financial planners often recommend that retirees weigh both lifestyle preferences and the financial implications of relocating. In Arizona’s case, the combination of low taxes and moderate living costs makes it a compelling option for many.