Will Arizona Tax Your Social Security? Here’s How to Keep More of Your Benefits

Arizona retirees have good news when it comes to their Social Security benefits: the state does not tax them. However, retirees may still be subject to federal taxation on their benefits depending on their total income. Understanding how Social Security taxation works and implementing smart financial strategies can help retirees protect their money.

Arizona’s Tax Policy on Social Security Benefits

Arizona is among the states that do not impose a tax on Social Security benefits. This means that regardless of your income level, you won’t owe state taxes on the money you receive from Social Security.

However, that doesn’t mean retirees are completely off the hook. The federal government may tax Social Security benefits depending on a retiree’s combined income.

Federal Taxation of Social Security Benefits

The IRS determines how much of your Social Security benefits are taxable based on what’s called “provisional income.” This includes:

• Adjusted Gross Income (AGI) – all taxable income excluding Social Security benefits.
• Non-taxable interest – such as interest from municipal bonds.
• Half of your Social Security benefits.

If your provisional income exceeds certain thresholds, a portion of your benefits will be subject to federal tax:

Taxable Social Security Benefits by Income Level

• Single Filers
  • $25,000 or less: No tax on benefits
  • $25,001 to $34,000: Up to 50% of benefits may be taxable
  • Above $34,000: Up to 85% of benefits may be taxable
• Married Filing Jointly
  • $32,000 or less: No tax on benefits
  • $32,001 to $44,000: Up to 50% of benefits may be taxable
  • Above $44,000: Up to 85% of benefits may be taxable

For example, a couple with a combined income of $106,000 (including $70,000 from retirement withdrawals and $72,000 in Social Security benefits) could have $58,700 of their Social Security benefits subject to federal taxation.

To calculate how much of your benefits may be taxable, visit the IRS website: https://www.irs.gov/.

How to Reduce Taxes on Social Security Benefits?

Although Arizona does not tax Social Security benefits, retirees can take steps to minimize the federal taxes they owe. Here are some key strategies:

1. Manage Retirement Account Withdrawals

Distributions from traditional IRAs and 401(k) accounts are taxable and count toward provisional income. Retirees can strategically withdraw funds to stay under the income thresholds that trigger Social Security taxation.

2. Consider Roth Accounts

Withdrawals from Roth IRAs and Roth 401(k)s are tax-free and do not count toward provisional income. By shifting savings into these accounts before retirement, retirees can reduce their taxable income in later years.

3. Delay Social Security Benefits

Delaying Social Security until age 70 results in higher monthly payments. This strategy can be beneficial if a retiree can rely on tax-free or lower-tax income sources earlier in retirement.

4. Utilize Qualified Charitable Distributions (QCDs)

Individuals 70½ or older can donate up to $100,000 per year directly from their IRA to a qualified charity. These donations reduce taxable income and do not count toward provisional income.

To learn more about QCDs and retirement tax strategies, visit the IRS publication on required minimum distributions: https://www.irs.gov/retirement-plans/required-minimum-distributions.

5. Monitor Other Income Sources

Additional income from part-time work, investments, or rental properties can increase provisional income. Retirees should be mindful of how much they earn to avoid pushing their Social Security benefits into a higher tax bracket.

Final Thoughts

While Arizona provides tax relief by not taxing Social Security benefits, federal taxation remains a factor for many retirees. By strategically managing income sources, retirees can reduce their tax burden and maximize their Social Security benefits. Consulting with a financial advisor or tax professional can further help tailor a plan that ensures a financially secure retirement.

For the latest updates on Social Security taxation, visit the Social Security Administration’s website: https://www.ssa.gov/.

This article has been carefully fact-checked by our editorial team to ensure accuracy and eliminate any misleading information. We are committed to maintaining the highest standards of integrity in our content.