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. Up to $3,500 of military retirement income is also tax-free in Arizona. 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, starting in 2021, Arizona will impose a 3.5% surtax on taxable income over $500,000 for joint filers and over $250,000 for single taxpayers.)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 $54,544 of taxable income for married filers and up to $27,272 for single filers)High: 4.5% (on $327,263 and over of taxable income for married joint filers and $163,632 and over for single filers)Starting in 2021, Proposition 208 (approved by voters on the November 3, 2020, ballot) imposes a 3.5% surtax on taxable income over $500,000 for joint filers and over $250,000 for single taxpayers. 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.In addition, up to $3,500 of military retirement income is exempt.Railroad Retirement benefits are also 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 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 2020, one owner of a property must have total income of $37,584 or less, and multiple owners of a property must have combined income of $46,980 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.