Arizona Military Retired Pay and Active Duty Pay Tax Exemption

Arizona used to allow a subtraction of only $3,500 of military retired pay. Senate Bill 1331 replaced that cap. For taxable years from and after 2020, the full amount of benefits, annuities, and pensions received as retired or retainer pay of the uniformed services of the United States is subtracted from Arizona gross income. The practical effect is that Arizona does not tax military retired pay at all. There is no dollar ceiling, no age threshold, and no length-of-service condition. A medically retired service member with four years in is treated the same as a thirty-year retiree. A veteran who moved to Arizona before 2021, or who read a guide written before then, may still believe only $3,500 is exempt. It is worth checking returns for open years. Active duty pay is also outside the Arizona tax base. Compensation for active service as a member of the reserves, the National Guard, or the armed forces of the United States is deductible to the extent it is not already excluded federally, and that expressly includes compensation for service in a combat zone under section 112 of the Internal Revenue Code. Survivor Benefit Plan annuities are not subject to Arizona income tax. VA disability compensation, VA pension, and Dependency and Indemnity Compensation are not in federal adjusted gross income, and Arizona starts from that figure, so none of them are taxed here either. Under the federal Military Spouses Residency Relief Act, a nonresident spouse of a nonresident service member is not taxed by Arizona on earnings in the state. The subtraction is claimed on the Arizona return. Read the Department of Revenue's military filing guidance for the current year before filing, since the line numbers move.