I Asked ChatGPT How Much I’d Pay in Taxes If I Retired in Arizona

Paying taxes on retirement income is unavoidable, but what you pay depends heavily on where you live and your income sources. If you’re planning to retire in Arizona, you’ll want to run the numbers beforehand so you’re not blindsided.

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GOBankingRates asked ChatGPT how much people who retire in Arizona pay in taxes, and on what. The simple answer is that, while Arizona does have a state income tax, things like Social Security and military retirement pay are exempt from it. You will still have to calculate federal taxes on these.

Like most of the U.S., Arizona has state income tax, but it’s lower than in many other parts of the country. According to ChatGPT, the Arizona Department of Revenue and the AARP, these are the main state taxes that could impact retirees:

• Income tax: Arizona has a 2.5% state income tax (flat rate). Social Security benefits and military retirement pay are exempt from this tax. Private pensions, IRA and 401(k) withdrawals and investment income are subject to state income tax. Retirees can subtract up to $2,500 annually from their state/local government pension, as well as U.S. government service and civil service pensions.

• Sales tax: Arizona has a 5.6% state sales tax, but each county and city may add an additional local tax. The combined average sales tax rate is 8.38%. In some counties, it may be 12% or higher.

• Property tax: Retirees who own their home are also subject to a 0.45% property tax rate. This is the fourth lowest in the U.S.

• Inheritance tax: Arizona doesn’t have a state or inheritance tax.

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While ChatGPT didn’t include this in its response, Arizona does have a few tax breaks for those ages 65 and up. According to the AARP, a big one is the Senior Property Valuation Protection Option. This puts a pause on the taxable value of their primary residence for up to three years, which can lower their overall tax bill.

To be eligible, the retiree must earn no more than $45,264 (or $56,580 if there are multiple homeowners). This amount is averaged over the most recent three years.

Seniors who meet the income requirements and reside in Maricopa County are also eligible for Arizona’s Elderly Assistance Fund. This fund lowers primary school district taxes.

Last but not least, Arizona allows some homeowners to defer their property tax payments for up to a year. To be eligible, you must be at least 70 years old, own your own home and have a total annual taxable income of $10,000 or less.

In addition to state income tax, you’ll have to pay federal taxes. Here’s a breakdown of what these might look like for retirees, according to ChatGPT:

• Social Security: Up to 85% of your Social Security benefits may be taxed, but the exact percentage is based on your overall income, and among other recent changes, Trump has floated the idea of eliminating taxes on Social Security. Those whose income falls below a certain threshold don’t have to pay Social Security tax.

• Pensions and other retirement accounts: Traditional pensions and annuities are generally fully taxable as ordinary income, but only for the years in which you make withdrawals. Qualified withdrawals from Roth IRAs and Roth 401(k) accounts are tax-free.

• Other investments: Long-term capital gains and qualified dividends may be taxed at a zero, 15 or 20% rate, depending on your combined taxable income and any other relevant taxes. Non-qualified dividends and interest are taxed as ordinary income.

There’s no federal property tax or sales tax. There is, however, an estate/inheritance tax. As per the IRS, any gifted or inherited amount up to $13.9 million is exempt from federal estate tax.

This depends heavily on factors like your filing status, taxable and non-taxable income sources, age and combined income.

ChatGPT gave a simple example of what a single retiree might pay in Arizona. Say you receive $20,000 in Social Security and $30,000 in a private pension every year. You don’t receive military pay or a government or public pension.

Here’s how your income would likely be taxed:

• Social Security benefits — Not taxed by Arizona

• Private pension — Taxed at 2.5%

• Total annual tax (Arizona) — $750 as only the pension is taxable (2.5% ?– $30,000)

For a more accurate estimate of your possible tax liability — and any deductions or credits — run your own numbers. When in doubt, speak with a professional who can help you through the complex process.

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