Retirement should be a time to enjoy your life and the fruits of your labor without worrying about complicated taxes.
Thankfully, Arizona taxes for retirees aren’t a particularly heavy burden. For many retirees, Arizona offers the tax conditions needed to maximize their retirement savings.
Many people wonder if Arizona is tax-friendly for retirees. The shower answer is yes. Arizona is a popular state for seniors who want to relocate because of its favorable taxes and low cost of living.
These are the taxes in Arizona for retirees to consider:
Arizona Income Tax for Retirees
Retirees need to consider that they have multiple sources of income. It is generally a best practice not to have all your eggs in one basket regarding income sources. However, this can complicate things with your income taxes. The Arizona income tax rate for retirees will be a flat 2.5 percent from the 2023 tax year onwards.
Arizona does not tax Social Security benefits. However, you may have to pay federal taxes on your Social Security if your income is above a certain threshold. Pensions and tax-deferred retirement accounts are subject to Arizona income tax for retirees. However, the lower Arizona state income tax rate for retirees lessens the tax burden.
Having a financial advisor by your side can help you lower your Arizona tax as a retiree. Since retirement income from pre-tax accounts is considered taxable income, you should seek to convert them to after-tax accounts. There are strategies, like Roth conversions, that could improve your financial position in terms of taxes.
Speaking with a financial planner with a tax background will help you to determine the right way to move forward. If you retire in Arizona, you will want someone versed in Arizona taxes for retirees.
Arizona Sales Tax for Retirees
Taxes apply to much more than income. They can touch everything from the property you own to a shopping trip.
Sales taxes affect the overall cost of living and quality of life. Fortunately, Arizona's cost of living is relatively low, even though the state sales tax is 5.6%.
Local taxes can drive up expenses for retirees, so accounting for these in your budget is a smart move. Specifically, if you plan on making a big purchase, consider where you make it. A purchase made in an area with a low local sales tax can save you money.
Some items are exempt from sales taxes, and these exceptions to Arizona taxes for retirees can be beneficial. This includes items such as groceries, prescription medications, and medical devices.
Arizona Property Taxes for Retirees
One major Arizona tax for retirees to consider is property tax. The state property tax rate is lower than the national average, at just 0.51%. Additionally, Arizona has a program that could eliminate your Arizona property tax as a retiree.
Senior Property Valuation Protection Program
Seniors can access the Senior Property Valuation Protection Program (or Senior Freeze) to help them manage their housing costs. The program freezes the taxable property value for qualifying seniors aged 65 or older. However, you must meet certain income and residency requirements.
This program is managed through county offices across Arizona. This program relieves seniors from high property taxes. This might occur due to rapidly increasing home values during a housing market boom.
By "freezing" the value of their home, seniors are protected from facing large tax bills. Elderly homeowners need to go through the process of renewing their financial protection every three years.
This means you can enjoy the financial security of knowing their property taxes will stay the same. These are the criteria:
- You must be 65 years old or older.
- Your property must be your primary residence.
- You must have been living there for a minimum of two years.
- Your total annual income must be less than $35,184. If your property has two or more owners, combined earnings cannot be more than $43,980.
- Your application must be filed by September 1 with your county assessor.
Property Tax Credits
Arizona taxes for retirees can benefit from property tax credits. To apply, you need to meet the requirements:
- You must be 65 years or older.
- The total household income must be less than $3,751 if you live alone. Or it must be less than $5,501 if you live with someone else.
- Suppose you paid property taxes or rent on your primary residence in Arizona during the tax year. In that case, you may be eligible for a deduction.
With this assistance, seniors can enjoy the security and comfort of a safe place to call home.
Arizona Inheritance and Estate Taxes
Arizona taxes for retirees don’t include inheritance or estate taxes. You wouldn’t need to pay these taxes in the state, but you may have to pay federal taxes.
However, when it comes to inheritances and estate planning, there are other expenses besides tax implications to consider, like probate. While probate isn’t inherently bad, it can be expensive and you might want to avoid it.
A financial planner can help you with estate planning and wealth management strategies. These strategies could include gifting assets, setting up trusts or other entities, and more. You can have peace of mind knowing that you won’t place an unnecessary burden on your beneficiaries.
Financial Planning for Arizona with Taxes in Mind
Retirement planning should be more than stockpiling funds. It should be about managing your accounts to reduce your financial burden during your golden years. An asset management strategy is a powerful tool for financial planners.
By leveraging suitable types of retirement accounts to store assets, it's possible to optimize tax efficiency and maximize returns. Our knowledgeable financial planners can advise which assets should be held in which type of account for maximum benefit. We keep your goals and tax situation in mind to make strategic decisions.
As a one-stop-shop solution for financial planning, we have access to money managers, lawyers, and tax professionals. This gives you many perspectives as we review portfolios for key decision-making. We are fiduciaries, obligated to put your best interests first and working for your financial success.
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Stewart Willis is the founder and president of Asset Preservation Wealth & Tax, a financial planning firm in Phoenix, Arizona. Investment advisory services offered through Foundations Investment Advisors, LLC, an SEC registered investment adviser.
The commentary on this blog reflects the personal opinions, viewpoints and analyses of the author, Stewart Willis, providing such comments, and should not be regarded as a description of advisory services provided by Foundations Investment Advisors, LLC (“Foundations”), an SEC registered investment adviser or performance returns of any Foundations client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment, legal or tax advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Personal investment advice can only be rendered after the engagement of Foundations for services, execution of required documentation, including receipt of required disclosures. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Foundations manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Any statistical data or information obtained from or prepared by third party sources that Foundations deems reliable but in no way does Foundations guarantee the accuracy or completeness. Investments in securities involve the risk of loss. Any past performance is no guarantee of future results. Advisory services are only offered to clients or prospective clients where Foundations and its advisors are properly licensed or exempted. For more information, please go to https://adviserinfo.sec.gov and search by our firm name or by our CRD # 175083.
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