State tax rates and rules for income, sales, property, estate, and other taxes that impact retirees. Go to Retiree Tax Map Arizona Add to State Compare List | View List View State Compare List (0) selected | Compare up to 5 The Bottom Line Most Tax-Friendly Sunshine, sunshine, sunshine — and low taxes. The Grand Canyon State exempts Social Security benefits from state income taxes, plus up to $2,500 of income from federal and Arizona government retirement plans. Military retirement income is tax-free in Arizona, too. While plenty of other states have more generous exemptions, Arizona's low income tax rates for most people keep the net burden down. (Note that Arizona imposes a 3.5% surtax on taxable income over $500,000 for joint filers and over $250,000 for single taxpayers, but the overall tax rate (including the surtax) for those impacted by the surtax can't exceed 4.5%.)Sales taxes are above average in the state—the average combined (state and local) rate is 8.4% (11th-highest in the nation). However, Arizona does not have an estate or inheritance tax, which makes it a more attractive retirement destination for wealthier seniors. Income Tax Range Low: 2.59% (on up to $54,615 of taxable income for married filers and up to $27,808 for single filers)High: 4.5% (on $500,000 and over of taxable income for married joint filers and $250,000 and over for single filers)Beginning with the 2021 tax year, Arizona imposes a 3.5% surtax on taxable income over $500,000 for joint filers and over $250,000 for single taxpayers. However, the surtax can't increase the overall top rate above 4.5% (the 4.5% rate mentioned above includes the surtax). Also note that the surtax's constitutionality is being challenged in the courts.Beginning in 2022, a two-bracket tax rate structure will be adopted. The rates will be 2.55% (on up to $54,544 of taxable income for joint filers and up to $27,272 for single filers) and 2.98% (on over $54,544 of taxable income for joint filers and on over $27,272 of taxable income for single filers). The rates will decrease to 2.53% and 2.75%, respectively, if certain state revenue amounts are reached. The state will then adopt a single flat rate of 2.5% if another state revenue amount is reached. Taxation of Social Security Benefits Social Security benefits are not taxed by the state. Tax Breaks for Other Retirement Income Up to $2,500 of income from federal government, designated Arizona state government, and Arizona local government retirement plans is exempt.Military pensions and Railroad Retirement benefits are fully exempt (before 2021, only up to $3,500 of military retirement income was exempt). Sales Tax 5.6% state levy. Localities can add as much as 5.6% to that, but the average combined levy is 8.4%, according to the Tax Foundation.Groceries: Exempt from state tax, but local taxes may applyClothing: TaxableMotor Vehicles: TaxablePrescription Drugs: Exempt Real Property Taxes In Arizona, the median property tax rate is $617 per $100,000 of assessed home value. Homeowners who are at least 65 years old, have lived in their primary residence for at least two years and fall below certain income limits (for the 2022 program, one owner of a property must have total income of $40,368 or less, and multiple owners of a property must have combined income of $50,460 or less) can have the valuation of their property frozen for three years. The freeze can be renewed every third year.Homeowners who are at least 70 years old, have either resided in their primary residence for at least six years or have lived in the state for at least 10 years, and do not receive more than $10,000 of taxable income per year can defer their property taxes.A property tax refund credit of up to $502 is available against Arizona income taxes for homeowners or renters age 65 or older with total household income less than $3,751 for seniors who live alone or less than $5,501 for seniors who live with someone. Annual Car Taxes and Fees An annual vehicle license tax based on the car's sticker price (MSRP) and age is imposed. Estate and Inheritance Taxes No estate or inheritance tax.