When you reach retirement age in Arizona, you may start receiving regular payments from a pension plan, individual retirement account, or IRA, or other type of retirement account. Some forms of retirement income, such as Social Security benefits, are often tax-exempt. However, if you receive benefits from the Arizona State Retirement System, or ASRS, you must usually report them as taxable income.
The Arizona State Retirement System provides pension benefits to individuals who worked for Arizona's government or education system. These benefits come from accounts that pension recipients and their employers pay into prior to the recipients' retirement, though the balance of the account has no effect on the amount of benefits an individual receives.
The Internal Revenue Service, or IRS, generally considers ASRS pension benefits to be taxable income. However, benefits paid into the system prior to July 1, 1986 are exempt from federal income tax. If you receive an ASRS pension, you must report all benefits you paid into the system after this date as income. However, you are still able to deduct from this income for medical costs or other tax-exempt expenses you incurred during the year.
Though Arizona considers most pensions to be taxable income, you can deduct up to $2,500 from your total taxable income if you receive your pension from the state of Arizona, U.S. government or the U.S. military, at the time of publication. Since ASRS pensions come from the state of Arizona, they are eligible for this deduction. Arizona will tax your pension benefits at the same rate as your other taxable income.
Other Retirement Benefits
At the time of publication, Arizona does not require residents to pay income tax on Social Security benefits. However, Arizona does impose income tax on annuities, employer-sponsored pension plans and pensions received from other states. Unlike ASRS pensions, these benefits are not eligible for the $2,500 deduction.