Filing taxes can be a complex and often confusing process, particularly when determining whether you are even required to file. In Arizona, like in other states, not all residents are obligated to file a state income tax return. This largely depends on your income level, the type of income you receive, and how Arizona tax laws define gross income. For many individuals—especially retirees, students, part-time workers, and those on government assistance—knowing what income is exempt from taxation can help them avoid unnecessary filings and focus only on what matters for their financial situation.
In this guide, we will explore which types of income are not taxed by the state of Arizona, when you are legally exempt from filing a tax return, and why in some cases it might still be beneficial to file even if you’re not required to.
Understanding Arizona’s Income Thresholds
Arizona sets annual income thresholds that determine whether a resident is required to file a state tax return. These thresholds are based on your filing status and your Arizona gross income (AZGI), which starts with your federal adjusted gross income and includes certain Arizona-specific adjustments.
For example, in the 2023 tax year, a single filer under age 65 must file an Arizona return if their AZGI exceeds $13,850. For married couples filing jointly under age 65, the threshold is $27,700. These figures increase slightly for individuals over 65. If your total income falls below these levels, you are generally not obligated to file.
However, what matters most is not just how much money you earn, but the kind of income you receive. Some forms of income, while potentially substantial, are not counted toward the taxable base and therefore do not trigger a filing requirement.
Social Security and Disability Benefits
One of the most common sources of non-taxable income in Arizona is Social Security. The state does not tax any Social Security benefits, whether they are retirement, disability (SSDI), or survivor benefits. This is a major relief for seniors and those with disabilities who rely on these payments as their primary or sole source of income.
If you are living exclusively on Social Security, Arizona does not require you to file a state return. This remains true even if your benefits are taxed at the federal level, because Arizona explicitly excludes them from the calculation of your gross income. Likewise, Supplemental Security Income (SSI), which is provided to individuals with limited income and resources, is also not taxable and does not contribute to your filing obligation.
Government Assistance and Welfare Benefits
Public assistance programs such as food stamps (SNAP), Temporary Assistance for Needy Families (TANF), and Medicaid benefits are not considered taxable income by the federal government or by Arizona. These forms of aid are designed to support low-income individuals and families, and they are not treated as earnings for tax purposes.
If these types of benefits make up the entirety of your income for the year, you will not be required to file an Arizona state tax return. In addition, programs such as housing subsidies or child support received are similarly excluded from taxable income. These forms of support are meant to assist with basic living expenses and do not count as gross income under Arizona tax rules.
Military Benefits and Veterans’ Compensation
Arizona provides favorable tax treatment for military members and veterans. Most military retirement pay is now exempt from Arizona income tax, and all VA disability benefits are entirely tax-free. This includes both service-connected disability compensation and VA pensions. In addition, combat pay and other forms of active-duty compensation that are excluded from federal income are also not taxed by Arizona.
If your income consists entirely of military pensions or VA disability compensation, you generally do not need to file a state income tax return in Arizona. However, if you have other sources of taxable income—such as wages, investment income, or business earnings—you may still be required to file, depending on your total AZGI.
Workers’ Compensation and Injury Settlements
Income received through workers’ compensation programs for job-related injuries or illnesses is not taxable in Arizona. These payments are considered compensation for injury rather than income in the traditional sense, and they are fully exempt at both the federal and state levels.
Even if you receive a lump sum settlement or regular payments over time, these funds are not treated as part of your Arizona gross income. As such, individuals whose only income comes from workers’ compensation benefits are not required to file a state return.
Low-Wage Income and Part-Time Work
Many individuals work part-time or earn small amounts of income during the year, such as students, caregivers, or seasonal workers. If your total income from wages or self-employment is below Arizona’s filing threshold for your filing status, you are not required to file a return.
For example, a student working part-time who earns $10,000 during the year and has no other income would fall below the $13,850 threshold for single filers and would not need to file. However, if taxes were withheld from that income, filing a return could help recover a refund.
This also applies to gig workers and freelancers with minimal earnings. Arizona does not require tax filings unless your income exceeds the relevant threshold, though those who are self-employed must still consider whether they are liable for other taxes, such as federal self-employment tax.
Non-Taxable Investment and Interest Income
Not all investment income is considered taxable in Arizona. Interest earned from certain sources, such as U.S. Treasury bonds or Arizona municipal bonds, is excluded from Arizona gross income. While these investments may produce returns, they are not subject to state taxation.
If you earned only non-taxable interest or had investments that did not generate any income, you are not required to file a return. However, if your investments produce dividends, capital gains, or other income types, you may need to file, depending on the amounts involved.
Inheritances, Gifts, and Life Insurance Payouts
Arizona does not impose an inheritance tax, and it does not treat gifts or life insurance death benefits as taxable income. Receiving an inheritance or a cash gift—even a large one—does not automatically trigger a state filing requirement.
However, this does not mean that all transactions following an inheritance are tax-free. If you invest the inheritance or place it in an interest-bearing account, any income generated from it may be subject to taxation. Similarly, if you receive life insurance proceeds as a beneficiary, those funds are not taxed, but the earnings they produce later could be.
Educational Grants and Scholarships
Many students receive scholarships or educational grants that cover tuition, books, and related expenses. As long as these funds are used for qualified educational costs, they are not considered taxable income.
If your only income consists of non-taxable scholarships or grants, and you do not work or receive other income, you are not required to file a tax return in Arizona. However, if the scholarship includes a stipend for housing or meals or requires teaching or research duties, a portion may be considered taxable.
When Filing May Still Be Beneficial?
Even if you’re not required to file a tax return, there are situations where doing so might still work in your favor. If state taxes were withheld from your paycheck during the year, filing a return allows you to receive a refund. Additionally, low-income individuals may qualify for Arizona tax credits—such as the property tax credit or the family income tax credit—but you can only receive these by filing a return.
Filing can also be useful for maintaining eligibility for certain federal or state programs, applying for student financial aid, or proving income for rental agreements or loans.
Conclusion
In Arizona, not all forms of income are treated the same, and many residents—particularly those living on Social Security, veterans’ benefits, or government assistance—may find that they are not required to file a state tax return at all. Knowing which types of income are exempt from Arizona’s filing requirements helps you avoid unnecessary tax filings and keeps your financial planning straightforward. However, even if filing isn’t legally required, it may still be advantageous in order to claim credits or refunds. Always review your total income sources and compare them against current Arizona filing thresholds or consult with a tax advisor to make informed decisions about your tax obligations.
FAQs
Do I need to file an Arizona tax return if I only receive Social Security?
No. Arizona does not tax Social Security income. If that is your only income, you are not required to file a state return.
Are unemployment benefits taxed in Arizona?
Yes. Unlike Social Security or VA benefits, unemployment compensation is considered taxable income and may require you to file a return.
What if I earned a small amount from part-time work?
If your income is below the filing threshold for your filing status, you do not need to file. However, if taxes were withheld, you may still want to file to receive a refund.
Are student scholarships considered income?
Scholarships used for tuition and school-related expenses are not taxable. However, stipends for room and board or services rendered (e.g., teaching) may be partially taxable.
Do I need to file if I received only veterans’ disability payments?
No. VA disability payments are not taxable and do not require you to file a return unless you also have other taxable income.
