The Grand Canyon isn’t the only wonder that Arizona has to offer—this sunny state also boasts one of the lowest income tax rates of any state in the United States. At just 2.5%, most Americans would instantly pocket more of their income simply by moving to Arizona, especially if they’re moving from a high-tax state like New York or California.
Want to learn how Arizona’s low state income tax could impact your financial plan?
Contact the team at ARQ Wealth today for a free consultation from one of Arizona’s top-rated financial planners. Otherwise, let’s look at Arizona’s state income tax and see how it compares to other states.
What is Income Tax?
Income tax is the tax that both individuals and corporations pay on income they generate. Any American who earns over a certain threshold each year is responsible for paying income taxes to both the federal and state governments.
Income taxes create a stream of revenue for governments to help fund public programs. Your federal income taxes help pay for national defense and safety nets like Social Security or Medicare/Medicaid. On a smaller level, your state income taxes help pay for initiatives like public education or public transportation systems.
Each state charges a different income tax on its residents since each state has different initiatives that it wants to fund. With that in mind, let’s examine Arizona’s state income tax and see how it stacks up against the rest of the United States.
What is Arizona’s Income Tax?
As of 2024, Arizona charges a flat income tax rate of 2.5% for residents of all income levels and filing statuses. This means that all full or part-time residents of Arizona are responsible for paying 2.5% of their income towards the state’s income tax if they earn over the following thresholds:
- Single: $13,850
- Married filing jointly: $27,700
- Married filing separate: $13,850
- Head of household: $20,800
People who earn below these thresholds do not have to pay Arizona’s income tax.
Arizona’s 2.5% income tax rate applies to any income that you earn while living in Arizona. However, some forms of income are exempt from Arizona income taxes, including:
- Interest from U.S. government bonds or obligations
- Social Security retirement benefits received under Title II of the Social Security Act
- Benefits received under the Railroad Retirement Act
- Active duty military pay
- Pay received for active service as a reservist for a National Guard member
- Benefits, annuities, and pensions as retired or retainer pay of the uniformed services of the United States (tax year 2021 and forward)
You will not have to pay income taxes on any income that you earn from these sources, according to the Arizona Department of Revenue. With that in mind, let’s see how Arizona’s income tax compares to other U.S. states.
How Does Arizona’s State Income Tax Compare?
We took a detailed look at Tax Foundation’s State Individual Income Tax Rates and Brackets, 2024 to see how Arizona’s income tax compared to other states:
- Low for the Southwest: Arizona’s 2.5% tax rate is one of the cheapest in its region and is lower than California (13.3%), New Mexico (5.9%), Colorado (4.4%), and Utah (4.65%). However, it’s higher than Nevada and Texas—both of which have no state income tax.
- Lower than most states: On a national scale, Arizona’s tax rate is lower than most states. In fact, it’s the lowest of any state that charges an income tax. It’s also significantly cheaper than states with a high tax rate like California (13.3%), New York (10.9%), New Jersey (10.75%), Oregon (9.9%), Minnesota (9.85%), Massachusetts (9%), Vermont (8.75%), Wisconsin (7.65%), and Maine (7.15%).
- Higher than states with no income tax: Arizona’s income tax rate is higher than the nine states with no income tax, which are Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming.
Overall, Arizona’s income tax is low compared to the majority of U.S. states and is only higher than states that do not charge an income tax.
What Else to Know About Arizona Taxes
Income taxes are just a small part of the total tax liability that you’ll need to pay if you live in Arizona. Let’s explore a few of the other taxes that you’ll be responsible for.
What is Arizona’s Real Estate Tax?
Arizona has a 0.63% percent effective property tax rate on owner-occupied housing value, according to the Tax Foundation. However, your real estate taxes will fluctuate widely depending on the county you live in, so it’s best to contact a professional tax planner before making any major decisions.
What is Arizona’s Sales Tax?
Arizona has a 5.6 percent state sales tax rate and an average combined state and local sales tax rate of 8.38 percent, according to the Tax Foundation. You can expect to pay these taxes whenever you purchase something within the state.
What Else to Know About Arizona Taxes
There are several other factors to be aware of regarding Arizona’s tax system.
To start, Arizona uses a “flat” income tax system. This means that the same 2.5% rate applies to everyone, regardless of their income level. This can be advantageous for Arizona residents with a high taxable income because they will not have to pay taxes in relation to their income, which is required in states that use graduated tax brackets.
Additionally, Arizona does not charge an estate or inheritance tax. This makes the state popular with retirees who want to minimize their tax burden during their golden years.
Finally, Arizona offers extensive tax credits designed to help its residents pay less in taxes. For more information on using tax credits to offset your tax bill, contact a member of the ARQ Wealth team.
How Much Tax Will I Pay in Arizona?
Arizona’s low state income tax can make it an attractive destination for people looking to reduce their tax burden and make the most of their income. But your tax liability is just one aspect of living in Arizona. You’ll also want to consider the total cost of living in Arizona, which will have a much bigger impact on your day-to-day finances than your tax bill.
Before moving to Arizona, you’ll want to consider whether or not Arizona is the right location for you. Arizona may be attractive from a tax perspective. But, it might not be worth moving to Arizona if you don’t enjoy the sun, heat, and desert (which the state has in abundance).
When in doubt, you can always contact one of the professionals on the ARQ Wealth team for more assistance with taxes or financial planning. Our team is highly knowledgeable about the pros and cons of living in Arizona from both a financial and lifestyle perspective.
