Arizona Income Tax Explained

If you earn an income in Arizona, you know you’ll lose something to taxes. But how much? It’s important to understand your state’s taxes and how they will impact your financial future, not least because that knowledge will empower you to take action to reduce your tax bill today.

So, let’s dive in!

What is the Income Tax? 

Income taxes are taxes imposed on individuals or entities that earn ordinary income. Ordinary income refers to the income that you earn from your usual sources, like a paycheck from your job, or profits from your small business. It’s also the money you might get from things like rental income, dividends, interest, royalties, and even some retirement accounts.

Think of ordinary income as the typical money you earn day in and day out. Unlike other types of income such as long-term capital gains or qualified dividends, which can get preferential tax treatment, your ordinary income gets no special tax perks and typically has a higher tax rate.

The amount of income tax a person or entity pays typically depends on their income level: The federal income tax and most state versions are “progressive,” which means that the share of your income that you will pay in taxes goes up as you earn more, though some states do levy a fixed percentage, or “flat,” income tax.

In the United States, federal income taxes can range from 10% to 37% of a person’s taxable income, and state taxes run from 0% in nine states to north of 13%. In addition to federal income taxes, most states also impose their own income taxes, which can vary widely.

Let’s now walk through both types of income taxes.

What is the Federal Income Tax?

The federal income tax is a tax that the United States government levies on the annual earnings of individuals, corporations, trusts, and other legal entities. It’s a portion of your income you must pay to the federal government to fund its operations. This tax is progressive, which means the tax rate you pay — the percentage of each additional dollar that goes to the government — increases as your income increases. For individuals, the income tax rates on ordinary income (as distinguished from capital gains) start at 10% and increase up to 37% as your income tax bracket increases.

The amount of tax you owe each year is calculated based on your gross income, which includes wages, interest, dividends, and other earnings.

Federal Ordinary Income Tax Rates for 2023

Taxable Income (Single Filers)	Taxable Income (Married Filing Jointly)	Tax Rate on This Income
$0 to $11,000	$0 to $22,000	10%
$11,000 to $44,725	$22,000 to $89,450	12%
$44,725 to $95,375	$89,450 to $190,750	22%
$95,375 to $182,100	$190,750 to $364,200	24%
$182,100 to $231,250	$364,200 to $462,500	32%
$231,250 to $578,125	$462,500 to $693,750	35%
$578,125 or more	$693,750 or more	37%

What would these numbers look like in the real world? Let’s consider an individual whose taxable ordinary income is $350,000. This person falls into the 35% tax bracket. As a result of the progressive tax system, however, not every dollar they earn will be taxed at that rate. As you can see from the table, the 35% bracket begins at $231,250 of income. This means that the dollars the individual earns over $231,250 will be taxed at 35%. But dollars below that amount will be taxed at the rate corresponding to the brackets they fall into.

So, for this individual:

• The first $11,000 of income is taxed at 10% (for a total of $1,100)
• The next portion of income, from $11,000 to $44,725, is taxed at 12% (for a total of $4,047)
• The income from $44,725 to $95,375 is taxed at 22% (for a total of $11,143)
• The income from $95,375 to $182,100 is taxed at 24% (for a total of $20,814)
• The income from $182,100 to $231,250 is taxed at 32% (for a total of $15,728)
• And finally, the income from $231,250 (the beginning of the 35% bracket) to $350,000 (this individual’s income) is taxed at 35% (for a total of $41,562)

Adding these amounts together, the individual would pay a total of $94,394 in federal income taxes for 2023.

You now understand how federal income tax rates apply! What about Arizona State taxes?

What is Arizona’s state income tax?

Arizona is one of the 13 states with a flat income tax rate. In the case of Arizona, no matter the amount of taxable ordinary income, the state tax rate will always be 2.5%.

What is tax planning?

As you can see, income taxes are the primary tax most individuals face and are often their biggest annual cost. Accordingly, it’s critical to identify strategies that can reduce this tax.

Tax planning is a strategic approach designed to reduce a person’s or a company’s tax liability by leveraging various tax benefits and allowances. It’s about understanding the tax implications of your financial decisions, so you can minimize your taxes and, ultimately, keep more of your hard-earned money.

This might involve making investments that offer tax benefits, choosing the right type of retirement account, taking advantage of deductions and credits, or investing in a tax advantaged account.

Tax planning ideas to reduce Arizona income taxes

Several different tax planning strategies can help you reduce your income tax liability in Arizona. Here are the five we consider most advantageous:

1. Maximize Retirement Contributions: federal tax laws allow deductions for contributions to certain retirement accounts like a 401(k) or an IRA. Maxing out these contributions can lower your taxable income.
2. Charitable and Other Deductions: If you have significant deductible expenses such as home mortgage interest or charitable contributions, itemizing your deductions on your state and federal tax returns might offer a larger tax benefit than the standard deduction. If you are charitably inclined, a Charitable Lead Annuity Trust (CLAT) might be an option to increase your charitable deductions this year and minimize your income tax liability.
3. Sell Appreciated Assets in Tax Exempt Trusts: You can minimize your taxable capital gains by moving appreciated assets into a tax exempt trust like Charitable Remainder Trusts before you sell them. Learn more about Charitable Remainder Trusts here.
4. Invest in Renewable Energy Projects: By investing in renewable energy projects you can use government tax incentives like tax credits and depreciation to significantly lower your income taxes. You can learn more here.

Conclusion

Income taxes can significantly reduce the wealth your family keeps every year. Fortunately, there are several strategies available to minimize these income taxes. You can read more here, use our Guided Planner tool to find helpful solutions, or schedule a time to talk with our expert team

About Valur

At Valur, we have built a platform to give everyone access to the tax and wealth-building tools of the ultra-rich like Mark Zuckerberg and Phil Knight. We make it simple and seamless for our customers to take advantage of these hard-to-access tax-advantaged structures so you can build your wealth more efficiently at less than half the cost of competitors. From picking the best strategy to taking care of all the setup and ongoing overhead, we make it easy and have helped create more than $700m in wealth for our customers.