New Mexico's income tax is graduated rather than flat, running from 1.5% on the lowest bracket up to 5.9% on income above roughly $315,000 for a single filer (the exact bracket thresholds are adjusted periodically). For a retiree with modest total income, the lowest New Mexico brackets can actually beat Arizona's flat 2.5%, since some of that income is taxed at 1.5% or 3.2% rather than a flat 2.5% across the board. As income rises through New Mexico's brackets, this advantage disappears and reverses, most retirees with meaningful IRA, 401(k), or pension income end up facing a blended New Mexico rate above Arizona's flat 2.5%.

Social Security treatment is where the two states diverge most clearly. Arizona exempts Social Security completely, for every retiree, regardless of income level. New Mexico's exemption, in place since 2022, only applies below $100,000 in income for single filers or $150,000 for married filing jointly ($75,000 for married filing separately); above those thresholds, Social Security becomes taxable in New Mexico under its regular graduated rates. A higher-income retiree who'd pay no state tax on Social Security in Arizona could face a real New Mexico tax bill on the same benefit.

New Mexico's $8,000 deduction for retirement income for taxpayers 65 and older is a genuine, if modest, offsetting benefit that Arizona doesn't have an equivalent for. For a retiree with $30,000 in annual pension and IRA withdrawals, that deduction shelters a meaningful share of it from New Mexico's graduated rates, narrowing, though not eliminating, the gap against Arizona's flat rate.

Both states fully exempt military retirement pay, Arizona since 2021 with no cap, and New Mexico similarly exempts military retired pay along with state PERA and ERB pension income for public employees. For military retirees, this particular income source is a wash between the two states; the comparison for that population comes down to how the rest of their income, a second career's pension, IRA withdrawals, is taxed.

Neither state has an estate or inheritance tax, so that factor is neutral. Property tax rates in both states run in a similar, moderate range nationally, with meaningful variation by county in both, so a precise comparison depends on the specific counties or cities being considered rather than a single statewide number.

For most Singh PWM clients, whose income tends to include meaningful IRA, 401(k), or pension withdrawals well above New Mexico's lower brackets, Arizona's flat 2.5% is very likely to produce the lower overall state tax bill. The exception is a retiree with low total income, largely Social Security and a small pension, staying comfortably under New Mexico's Social Security exemption threshold, where the two states land much closer together.

Roth conversion strategy is worth modeling separately in each state before assuming the same conversion schedule works identically in both. In New Mexico, a large conversion in a given year not only faces the state's graduated rates on the converted amount but can also push total income over the $100,000/$150,000 Social Security threshold, making Social Security taxable in that same year on top of the conversion tax. Arizona has no equivalent cliff, since Social Security is unconditionally exempt regardless of what else happens on the return that year.

New Mexico's gross receipts tax structure, its version of a sales tax, is also worth factoring into a full cost-of-living comparison rather than looking at income tax alone. Effective combined rates in parts of New Mexico run higher than Arizona's typical combined sales tax, a real, ongoing cost that offsets some of New Mexico's advantage for lower-income retirees relying on its Social Security exemption and 65+ deduction.

Neither state has an estate or inheritance tax, and property tax rates in both states run in a broadly similar, moderate national range, with meaningful variation by county. For most households, the decision between Arizona and New Mexico ultimately turns on the income tax comparison run against actual projected income sources, since the other cost factors are close enough between the two that they rarely reverse the direction the income tax math already points toward.

If your total income (excluding Social Security) is modest and you'd stay well under New Mexico's $100,000/$150,000 Social Security exemption threshold, run the actual comparison, the two states may land closer together than the headline rate difference suggests, especially once New Mexico's 65+ deduction is factored in.

If you're drawing meaningful annual income from IRA, 401(k), or pension accounts, particularly above New Mexico's lower brackets, Arizona's flat 2.5% is very likely the lower-tax option, and the gap widens as income rises.

• Comparing only the headline top marginal rates (2.5% flat versus up to 5.9%) without checking where your actual income falls within New Mexico's graduated brackets.
• Assuming Social Security is treated identically in both states. Arizona exempts it at every income level; New Mexico's exemption phases out above $100,000 single / $150,000 married filing jointly.
• Overlooking New Mexico's $8,000 deduction for retirement income for those 65 and older, a real, if modest, offsetting benefit against its otherwise higher blended rate for retirement account income.
• Not accounting for military retirement pay being fully exempt in both states, this income source shouldn't factor into the state comparison at all for military retirees.