Arizona does not tax most pension income, but the rules depend on what kind of pension you receive and when you started collecting it

Arizona has a blanket exemption for pension income. If you receive a pension from a government employer — federal, state, or local — or from a private employer, Arizona does not tax that money as income on your state tax return. This applies whether you worked in Arizona or somewhere else. The exemption covers military pensions, teacher pensions, police and fire pensions, and corporate pension plans.

The one major exception is if you started receiving your pension before January 1, 1985. Those older pensions are taxable in Arizona. This is a narrow group now, but it matters if you are one of them. You will owe Arizona state income tax on the full amount of that pre-1985 pension.

Social Security benefits are also exempt from Arizona taxation, which is separate from the pension exemption but works in your favor if you receive both.

Key Takeaways

  • Pensions from government and private employers are not taxed by Arizona if you started receiving them on or after January 1, 1985.
  • If your pension began before January 1, 1985, Arizona taxes it as ordinary income at the state's current rates.
  • Military pensions follow the same rule: exempt if you started collecting them in 1985 or later.
  • Social Security is also exempt from Arizona state tax, separate from the pension exemption.
  • You still file a federal tax return and pay federal income tax on your pension; the Arizona exemption applies only to state tax.

How the 1985 cutoff works in practice

The January 1, 1985 date is the dividing line in Arizona law. If your first pension payment arrived on or after that date, you owe no Arizona state income tax on it, no matter how large the pension is. If your first payment arrived before that date, every dollar of that pension is subject to Arizona income tax.

This matters most for people who retired in the 1970s and early 1980s. If you are still receiving a pension that started then, you will need to report it on your Arizona tax return and pay tax on it. The tax rate depends on your total income and filing status, just like any other taxable income.

If you receive more than one pension — for example, a military pension and a civilian government pension — the same rule applies to each one separately. Both are exempt if both started in 1985 or later.

What counts as a pension under Arizona law

Arizona's pension exemption covers regular, recurring payments from a retirement plan. This includes defined-benefit pensions (the kind where your employer promises you a specific monthly amount based on years of service and salary), annuities purchased with retirement savings, and distributions from certain retirement accounts once you reach retirement age.

The exemption does not cover one-time lump-sum distributions from retirement plans, even if you roll them into an IRA or other account. If you took a lump sum from a pension plan and are now drawing it down, those withdrawals are not automatically exempt. However, if you rolled that lump sum into an IRA and are now taking regular distributions from the IRA, those distributions may be treated differently depending on the circumstances — this is where you need to check with a tax professional or the Arizona Department of Revenue.

Distributions from a 401(k), 403(b), or similar plan are generally not pensions under this rule, even though they are retirement income. Those are taxable by Arizona unless another exemption applies.

Federal tax still applies to your pension

The Arizona exemption is state-level only. You still owe federal income tax on your pension. When you receive pension payments, your employer or the plan administrator withholds federal tax based on the W-4P form you filed with them. You report the full amount of your pension on your federal tax return (Form 1040) and pay federal tax on it according to federal rates and rules.

Arizona's exemption simply means you do not report that same pension income on your Arizona tax return. You file both returns — federal and state — but only the federal one includes your pension income.

How to report a pension on your Arizona return

If your pension is exempt (started in 1985 or later), you do not report it on your Arizona return at all. You receive a 1099-R form from your pension provider showing the amount paid to you, but you do not enter it on your state tax forms.

If your pension is taxable (started before 1985), you report it on your Arizona return the same way you report any other income. You will receive a 1099-R, and you enter the taxable amount on the appropriate line of your Arizona tax form. The Arizona Department of Revenue provides worksheets and instructions with the annual tax forms.

If you are unsure whether your pension qualifies for the exemption, contact the Arizona Department of Revenue directly. They can confirm the start date of your pension and whether it is exempt. You can also ask your pension provider for the exact date your payments began.

Pensions from other states and federal employment

It does not matter where you worked or where your employer was located. If you receive a pension from a federal agency, another state's government, or a private company in any state, and that pension started in 1985 or later, Arizona does not tax it. You can move to Arizona after retiring and bring your out-of-state pension with you tax-free.

Federal employee pensions (FERS or CSRS) are exempt under this same rule if they began in 1985 or later. Military pensions are also exempt if they started in 1985 or later, regardless of where you served or where you live now.

Frequently Asked Questions

Do I have to file an Arizona tax return if I only have pension income?

If your only income is an exempt pension (started in 1985 or later), you do not have to file an Arizona return. However, if you have other income — wages, interest, capital gains — you must file and report that income. Check the current filing requirements with the Arizona Department of Revenue, as thresholds change year to year.

What if I started my pension in 1984 but did not receive the first check until 1985?

The rule is based on when you started receiving payments, not when you became may be able to access. If your first check arrived in 1985 or later, the pension is exempt. The date on your first 1099-R form is the date that matters.

Are disability pensions treated the same way?

Yes. If you receive a disability pension from a government or private employer and it started in 1985 or later, it is exempt from Arizona tax. The exemption applies to all pensions, regardless of whether they are based on age, years of service, or disability.

Can I move to Arizona to avoid taxes on my pension?

Arizona does not tax pensions that started in 1985 or later, so moving to Arizona will not change your tax status on an exempt pension. However, you become subject to Arizona tax on other income once you establish residency. Residency is based on where you live, not where you work, so moving to Arizona and working elsewhere does not exempt you from Arizona tax on wages.

What if I receive a pension and also work part-time?

Your pension income (if exempt) is not taxed by Arizona. Your wages from part-time work are taxed by Arizona at the normal rate. You report only the wages on your Arizona return, not the pension.