Arizona tax rates: Paying taxes in the Grand Canyon State

This article was fact-checked by our editors and a member of the Credit Karma product specialist team, led by Senior Manager of Operations Christina Taylor. It has been updated for the 2020 tax year.

Taxes are a reality of life in every state, even those with relatively low individual income tax rates like Arizona. The Grand Canyon State not only taxes income, but gasoline, real estate and purchases of goods and services, too.

If you live or work in Arizona, you’ll almost certainly be paying more than one kind of tax to the state or local governments. And even if you’re just passing through, you could find yourself subject to sales taxes on purchases of goods or services you make in the state.

Let’s look at the different kinds of taxes and tax rates you may encounter in Arizona.

• The basics of Arizona taxes
• Arizona income taxes
• Arizona sales tax
• Arizona property taxes
• Arizona estate tax
• Other taxes in Arizona

The basics of Arizona taxes

In Arizona, some of the taxes you pay will depend on your situation. People who work in Arizona can expect to pay a progressive income tax that’s based on four brackets.

Other types of taxes in Arizona include property taxes and a vehicle license tax. But the tax you might encounter most consistently is the Arizona “transaction privilege tax,” which is the sales tax. The state’s transaction privilege tax rate is 5.6%, and counties and municipalities can levy their own additional tax.

Arizona income taxes

Like the federal government, Arizona imposes a progressive state income tax based on tax brackets. For the 2019 tax year and after, personal income tax rates range from 2.59% to 4.5%, with people in higher brackets paying higher rates.

Qualifying Arizona residents can claim tax breaks in the form of credits and deductions to save on their tax bills. Generally, credits directly reduce the amount of tax you owe, while deductions reduce the amount of income that’s taxable.

Arizona taxpayers may take a standard deduction or itemize, though the state got rid of personal and dependent exemptions beginning in tax year 2019. The Arizona standard deduction matches the federal government’s: $12,400 for single and married filing separate filers, $18,650 for heads of household and $24,800 for filers who are married filing jointly.

Beginning in 2019, taxpayers who take the standard deduction can also deduct 25% of their annual charitable giving from their income — no itemizing needed.

And Arizonans can take some state-level tax credits, including …

• Child tax credit: Starting in 2019, the credit is worth $100 per dependent child 16 and younger and $25 for dependents 17 and older. The credit phases out once federal adjusted gross income hits $200,000 for single and married filing separately filers and $400,000 for joint filers.
• Solar energy credit: The credit is for up to 25% of the cost of installing solar panels as a nonrefundable tax credit, up to a cap of $1,000.
• Charitable contribution credit: If you donate to one of Arizona’s eligible charities, you can claim a tax credit of up to $800 if you’re married filing jointly. The maximum is $400 if you’re filing under any other status. The tax credit is worth more if you donate to one of the foster care charitable organizations: Up to $1,000 if you’re married filing jointly or a maximum of $500 under any other status.

Arizona sales taxes

Arizona’s sales tax is known as the Arizona transaction privilege tax, or TPT, and is currently set at 5.6%. But counties and cities around the state add fees that are unique to each industry, making the Arizona tax rate a little complicated.

For example, the combined state and county tax rate in Maricopa County (home to Phoenix) is 6.3% at bars and restaurants. The Phoenix city tax rate for that industry is 2.3%, which brings the total tax rate to 8.6% at Phoenix bars and restaurants. The Arizona Department of Revenue continually updates a list of tax rates for Arizona counties and cities by industry. On average, the combined Arizona sales tax rate is 8.33%.

In some cases, out-of-state entities that have a qualifying business in Arizona must collect a 5.6% use tax and remit to the state. If resident Arizona buyers don’t pay this sales tax to the merchant for an out-of-state sale, they must pay it to the state themselves.

Can I deduct sales taxes on my federal return?

If you itemize deductions on your federal income tax return, you can opt to deduct either state and local income taxes along with real estate and property taxes or state and local sales taxes along with real estate and property taxes.

You can’t deduct state and local income taxes and sales taxes, and the total deduction is limited to $10,000 ($5,000 if you’re married filing separately).

Arizona property taxes

Property taxes on residential homes are handled at the county level in Arizona. For example, according to assessor’s offices in a few counties in Arizona, every year, the county assessor will assess the value of each home, and the county’s treasury office will calculate and mail out tax bills based on the home’s value plus the tax rate for that area. In turn, homeowners pay their property taxes to the county (not the state’s revenue office). But the process may vary from county to county, so you should address questions on valuation and assessment to the assessor’s office in the county where the property is located.

The tax rate is composed of different taxes from multiple taxing authorities such as cities, counties, school districts, fire districts and water districts, so the tax rate varies in each city and county. You can visit your county’s official website for information on the tax rate in your district, when you should receive your tax bills and where to pay those bills. Some counties also offer ways to look up property tax rates for specific areas. You may need the parcel number for the area you’re checking.

Arizona estate tax

Since 2005, Arizona has not imposed an estate tax. The state also doesn’t tax inheritances. But if an estate is worth more than $11.4 million, there’s a chance it could be subject to the federal estate tax.

Other taxes in Arizona

Ready to hit the road in Arizona? Here are two common taxes you’ll encounter while driving in this state.

Vehicle tax

Instead of a personal property tax on vehicles, Arizona drivers pay an annual vehicle license tax, or VLT. It’s based on an assessed value of 60% of the manufacturer’s base retail price reduced by 16.25% for each year since the vehicle was first registered.

You can calculate the bill by multiplying a set rate for every $100 of the car’s assessed value. That rate is $2.80 for new vehicles and $2.89 for used vehicles. For example, for a new vehicle that costs $25,000, the first-year assessed value would be $15,000 and the VLT would be $420. In the second year, the assessed value would be $12,562.50 and the VLT would be $363.06.

Gas tax

The gas tax, which helps pay for road construction and improvements, is rolled into the cost of each gallon of gasoline at the pump. In addition to the gas tax imposed by the federal government, which is 18.4 cents, Arizona tacks on an additional 18-cent tax and 1-cent fee per gallon, for a total of 37.4 cents per gallon of gasoline.

Bottom line

Paying some form of tax in Arizona is inevitable. But keep in mind that taxes fund projects and services like improving roads, funding schools and maintaining Arizona’s 22 national parks.

If you’re just passing through Arizona, you won’t need to do much — just look for the tax rate on your receipts so you know how much you’re paying. But if you live in Arizona, the AZTaxes website can help you prepare your income tax return, explain how property taxes work in your area and identify tax breaks that reduce could reduce your state tax bill.

Christina Taylor is senior manager of tax operations for Credit Karma. She has more than a dozen years of experience in tax, accounting and business operations. Christina founded her own accounting consultancy and managed it for more than six years. She codeveloped an online DIY tax-preparation product, serving as chief operating officer for seven years. She is an Enrolled Agent and the current treasurer of the National Association of Computerized Tax Processors and holds a bachelor’s degree in business administration/accounting from Baker College and an MBA from Meredith College. You can find her on LinkedIn.