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

Arizona has one of the most pension-friendly tax codes in the country. If you receive a pension from a government employer — federal, state, or local — Arizona does not tax it. If you receive a pension from a private employer, Arizona also does not tax it. The state exempts all pension and annuity income from state income tax, regardless of source.

This exemption applies to pensions you receive now and pensions you will receive in the future. It does not matter whether your pension is from the military, a city fire department, a private corporation, or a union. It does not matter whether you are retired or still working. If the money is classified as a pension or annuity payment, Arizona does not tax it.

However, other retirement income — such as Social Security, 401(k) withdrawals, or IRA distributions — may be taxed differently. Understanding which income is covered by the pension exemption and which is not will help you plan your tax obligations.

Key Takeaways

  • Arizona exempts all pension and annuity income from state income tax, including pensions from government and private employers.
  • The pension exemption applies to anyone receiving pension payments, regardless of age, income level, or when they started collecting.
  • Social Security benefits, 401(k) withdrawals, and IRA distributions are not covered by the pension exemption and may be subject to Arizona income tax.
  • You do not need to take any action to claim the pension exemption — you report it on your state tax return and the exemption applies automatically.

What counts as a pension under Arizona tax law

Arizona's pension exemption covers regular, periodic payments from a retirement plan. The payment must be based on your age, length of service, or disability. The most common pensions that may have access to are monthly payments from a defined benefit plan — the kind where your employer promises you a specific amount each month for life.

Pensions from these sources are exempt: federal employee pensions, military retirement pay, state employee pensions (including Arizona Public Safety Personnel Retirement System and Arizona Employees Retirement System), local government pensions (city, county, school district), railroad retirement benefits, and private company pensions. If your employer set up a pension plan and you receive regular monthly payments from it, that income is exempt.

Annuities also may have access to for the exemption. An annuity is a contract that pays you a fixed amount at regular intervals, usually monthly. If you purchased an annuity with your own money or received one as part of a retirement plan, the payments are exempt from Arizona income tax.

Retirement income that Arizona does tax

Social Security benefits are not covered by the pension exemption. However, Arizona does not tax Social Security income either — the state has a separate exemption for it. You will not owe Arizona income tax on your Social Security payments.

401(k) withdrawals and traditional IRA distributions are taxed as ordinary income by Arizona. If you withdraw money from a 401(k) or IRA, that amount is subject to Arizona income tax at your regular tax rate. Roth IRA distributions are not taxed by Arizona, since they are not considered income. Early withdrawal penalties imposed by the federal government do not affect your Arizona tax liability.

Interest, dividends, and capital gains from investments are taxed normally. Distributions from a health savings account (HSA) used for non-medical expenses are taxed. Lump-sum pension payments — if your plan allows you to take all your pension at once instead of monthly payments — are taxed as ordinary income in the year you receive them, not exempt like regular pension payments.

How to report pension income on your Arizona tax return

You report pension income on your Arizona Form 140 (the state income tax return for residents) or Form 140-NR (for nonresidents). On the return, you list your total pension income and then claim the exemption. The exemption reduces your taxable income to zero for that source.

You will receive a Form 1099-R from the pension plan administrator showing the amount you received during the year. Use this form to fill out your state return. If you receive multiple pensions, you report each one separately, but they are all exempt.

You do not file a separate form or application to claim the exemption. The exemption is built into the tax code, and you claim it by reporting your pension income and marking it as exempt on your return. If you use tax software or work with a tax preparer, they will handle this step automatically.

Federal taxes still apply to most pensions

Arizona's exemption applies only to state income tax. Federal income tax is a separate matter and is not affected by Arizona law. Most pensions are subject to federal income tax. You will owe federal tax on pension payments unless the pension is from a Roth account or qualifies for another federal exemption.

The federal government taxes pension income at your ordinary income tax rate. If you are in the 22 percent federal tax bracket, you will owe 22 percent federal tax on your pension income. Arizona's exemption does not reduce this federal obligation.

Some military pensions have special federal treatment. Combat zone tax exclusion applies to military pay received while serving in a designated combat zone, but this is a federal rule, not an Arizona rule. If you have questions about federal taxation of your specific pension, contact the IRS or work with a tax professional.

Nonresidents and part-year residents

If you do not live in Arizona but receive a pension from an Arizona employer or Arizona government agency, Arizona does not tax that pension. The exemption applies to the source of the pension, not your residency status. You would file a nonresident return if you have other Arizona-source income, but your pension would still be exempt.

If you moved to Arizona during the year, you are a part-year resident. You report income earned before you moved as nonresident income and income earned after you moved as resident income. Pension payments you received while living in Arizona are exempt. Pension payments you received before moving to Arizona are not subject to Arizona tax because you were not a resident then.

Frequently Asked Questions

Do I have to be a certain age to get the pension exemption?

No. Arizona exempts all pension income regardless of your age. If you receive a pension at age 50, 65, or 80, the exemption applies the same way. Age does not affect whether your pension is taxed by Arizona.

What if I receive a lump-sum payment instead of monthly pension checks?

A lump-sum pension payment is taxed as ordinary income in the year you receive it, not exempt like regular monthly payments. If your plan offers the choice between monthly payments and a lump sum, the tax treatment is different. Consult a tax professional before choosing, as the federal tax impact may be significant.

Does the pension exemption apply if I still work for the same employer?

Yes. Some people receive pension payments while still employed by the same organization. Arizona exempts the pension portion regardless of whether you are still working. Your wages from active employment are taxed normally, but your pension payments are exempt.

Are military survivor benefits taxed by Arizona?

Military survivor benefits (Survivor Benefit Plan payments) are treated as pension income and are exempt from Arizona income tax. If you receive these payments as a surviving spouse or dependent, Arizona does not tax them.

If Arizona doesn't tax my pension, do I still have to file a state return?

You may still need to file even if your only income is a tax-exempt pension. Arizona requires you to file if your total income exceeds the filing threshold for your age and filing status, even if all of it is exempt. Check the current year's filing requirements or contact the Arizona Department of Revenue to confirm whether you must file.