Most pensions are taxable in Arizona at the state’s flat 2.5% income tax rate, but several exemptions can shrink or erase the bill. Military retirement pay is fully exempt with no dollar cap. Social Security and Railroad Retirement benefits are excluded entirely. Pensions from federal retirement systems or from Arizona state and local retirement systems qualify for a $2,500 per-person subtraction. Private pensions and withdrawals from 401(k)s and traditional IRAs are taxed in full.
How Arizona Builds the Tax on Your Pension
Arizona starts with your federal adjusted gross income and then applies its own additions and subtractions to reach Arizona adjusted gross income.1Arizona Legislature. Arizona Code 43-1001 – Definitions If a pension payment or retirement account distribution is taxable on your federal return, Arizona will tax it too unless a specific state subtraction removes it.
Since 2023, the state has used a single flat rate of 2.5% on all taxable income. Wages, investment income, pension payments, and retirement plan distributions are all taxed at the same rate. There are no brackets and no higher tier that kicks in at a threshold.
Military Retirement Pay Is Fully Exempt
For tax years beginning after December 31, 2020, Arizona excludes 100% of retired or retainer pay from the uniformed services of the United States, with no dollar cap.2Arizona Legislature. Arizona Code 43-1022 – Subtractions From Arizona Gross Income It applies to retirement pay from every branch, including reserve retirement.
The military exemption is claimed on a different line than the $2,500 government pension subtraction. A retiree who receives both military retired pay and a federal civil service pension can claim both. Active-duty and reserve pay for current service is handled under a separate subtraction in the same statute, so this exemption applies specifically to pay you receive after separating from the uniformed services.
Social Security and Railroad Retirement
Arizona fully excludes Social Security benefits from state income tax. Whatever portion of your Social Security is taxable on your federal return under Internal Revenue Code Section 86 gets subtracted back out on your Arizona return. Tier 1 and Tier 2 Railroad Retirement benefits included in your federal AGI receive the same treatment.3Cornell Law School. Arizona Admin Code R15-2C-305 – Social Security and Railroad Retirement Benefits You still report these amounts, but the subtraction zeroes them out for Arizona purposes.
The $2,500 Government Pension Subtraction
Arizona lets you subtract up to $2,500 of qualifying government pension income from your state taxable income. If both spouses on a joint return receive qualifying pensions, each spouse can claim the full $2,500, for a combined household subtraction of up to $5,000.4Arizona Department of Revenue. Arizona Form 140 Booklet – Section: Line 29a
Qualifying pensions come from two groups of plans:
- Federal retirement systems, including the U.S. Government Service Retirement and Disability Fund, the Foreign Service Retirement and Disability System, and any other retirement plan established by federal law (not merely regulated by it).
- Arizona state and local systems, including the Arizona State Retirement System, the Corrections Officer Retirement Plan, the Public Safety Personnel Retirement System, the Elected Officials’ Retirement Plan, optional retirement programs of Arizona’s Board of Regents or community college districts, and retirement plans of Arizona counties, cities, or towns.2Arizona Legislature. Arizona Code 43-1022 – Subtractions From Arizona Gross Income
Watch the boundary here. Government pensions from other states do not qualify. A retiree drawing a California state pension who moves to Arizona owes the full 2.5% on that income with no subtraction.4Arizona Department of Revenue. Arizona Form 140 Booklet – Section: Line 29a Private-sector pensions from former employers don’t qualify either.
401(k), IRA, and Other Retirement Account Withdrawals
Distributions from private retirement plans — 401(k)s, 403(b)s, traditional IRAs, and the like — are fully taxable in Arizona at 2.5%. No state subtraction applies. Whatever amount is taxable federally flows straight into your Arizona gross income.5Arizona State Retirement System. Tax Information
Qualified Roth IRA and Roth 401(k) distributions work differently. Because Arizona starts with federal AGI and qualified Roth distributions aren’t in federal AGI, they never enter Arizona taxable income. If you’ve cleared the five-year holding period and are over 59½, Roth withdrawals are tax-free at both levels.
Take a distribution before age 59½ and the federal government generally adds a 10% early withdrawal penalty on top of regular income tax, unless an exception applies. Common exceptions include total disability, substantially equal periodic payments, separation from service after age 55, and qualifying medical expenses.6Internal Revenue Service. Retirement Topics – Exceptions to Tax on Early Distributions Arizona imposes no separate state-level early withdrawal penalty. The taxable portion simply gets added to your Arizona gross income and taxed at 2.5%.
Retired public safety officers who pay health or long-term care insurance premiums directly from an eligible retirement plan distribution can exclude up to $3,000 per year from federal taxable income.7Internal Revenue Service. Publication 575 – Pension and Annuity Income Because Arizona builds off federal AGI, that federal exclusion carries through and lowers Arizona taxable income too.
If You Earned Your Pension in Arizona but Moved Away
Federal law prohibits any state from taxing the retirement income of a nonresident.8Office of the Law Revision Counsel. 4 USC 114 – Limitation on State Income Taxation of Certain Pension Income If you worked for an Arizona employer, earned a pension, and now live in another state, Arizona cannot tax those pension payments. The protection covers qualified trusts, simplified employee pensions, 403(a) and 403(b) plans, 457(b) plans, IRAs, and government retirement plans.
Residency itself is a separate question. Arizona presumes you’re a resident if you spend more than nine months per year in the state, though you can rebut that presumption with evidence that your presence is temporary.9Arizona Legislature. Arizona Code 43-104 – Definitions Full-year residents are taxed on all pension income from any source. Part-year residents owe Arizona tax on pension income received during their resident period, plus Arizona-source income received during the nonresident portion of the year.10Arizona Legislature. Arizona Code 43-1091 – Gross Income of a Nonresident
Reporting, Withholding, and Estimated Payments
Each payer sends you a Form 1099-R by January 31 showing total distributions and the taxable amount. On Arizona Form 140 for full-year residents, you start with federal AGI and claim the subtractions on their assigned lines: line 29a for the $2,500 government pension subtraction and line 29b for military retired pay. Social Security and Railroad Retirement subtractions appear on the standard adjustment lines.11Arizona Department of Revenue. Arizona Form 140 Booklet Part-year residents file Form 140PY and prorate the subtractions to the resident portion of the year.12Arizona Department of Revenue. Arizona Form 140PY Booklet
Pension payers don’t withhold state tax automatically. Arizona withholding is voluntary and starts when you file Form A-4P with your plan administrator, choosing a rate between 0.5% and 3.5% of the taxable distribution.13Arizona Department of Revenue. Arizona Form A-4P Picking 2.5% roughly matches the flat rate if you don’t have significant deductions or credits. You can change or cancel the election at any time by filing a new A-4P. Federal withholding on periodic pension payments is controlled through Form W-4P; without one on file, the payer withholds as if you’re single with no adjustments.14Internal Revenue Service. Form W-4P 2026 – Withholding Certificate for Periodic Pension or Annuity Payments
If withholding falls short, Arizona may require quarterly estimated payments. The requirement applies when Arizona gross income exceeds $75,000 for single filers or $150,000 for married filing jointly, and you met the same threshold the prior year. Quarterly payments are due April 15, June 15, September 15, and January 15 of the following year.15Arizona Department of Revenue. Arizona Form 140ES Booklet Federally, estimated payments are generally required if you expect to owe $1,000 or more after withholding and credits, with a safe harbor of paying at least 90% of the current year’s tax or 100% of the prior year’s tax (110% if prior-year AGI exceeded $150,000).16Internal Revenue Service. 2026 Form 1040-ES – Estimated Tax for Individuals