Arizona vs. Washington: Which Is Better for Retirement Taxes?

Washington's constitution has long been interpreted to bar a graduated income tax, and voters have repeatedly rejected proposals to create one, so wages, Social Security, pensions, and retirement account withdrawals all pass through completely untaxed at the state level. For a retiree whose income is Social Security, a pension, and standard IRA or 401(k) distributions, Washington functions exactly like the 'no income tax' reputation suggests, no state return, no age-based exemption to track, nothing to calculate.

The exception that catches people off guard is Washington's capital gains excise tax, in effect since 2022 and upheld by the Washington Supreme Court in 2023. It applies a 7% tax to long-term capital gains above an annually inflation-adjusted threshold, and an additional surcharge applies above a much higher threshold for the largest gains. Retirement accounts, IRAs, 401(k)s, and most qualified plans, are explicitly excluded, as is real estate, so a home sale or a standard retirement account withdrawal never triggers this tax regardless of size. What it does reach is the sale of stock, business interests, and other capital assets held in a taxable brokerage account above the threshold, a real, calculable cost for a retiree who built substantial after-tax investment wealth or is selling a business around retirement.

Arizona has no equivalent capital gains tax; long-term gains get a 25% subtraction before the flat 2.5% rate applies, bringing the effective long-term rate to roughly 1.875%, a meaningfully lower number than Washington's flat 7% on gains above its threshold. For a retiree planning a large one-time sale, a concentrated stock position, an investment property, a business, this is frequently the single largest state-tax difference between the two states, larger than the ordinary income comparison in either direction.

Washington is also one of a small number of states with its own estate tax, separate from and in addition to the federal estate tax. The exemption is set in the low millions and indexed periodically, well below the much higher federal exemption, and Washington's top rate on the largest estates is among the highest of any state that taxes estates at all. Arizona has no estate or inheritance tax whatsoever. For a retiree with a taxable estate likely to exceed Washington's exemption, this is a real, ongoing planning consideration that has no Arizona equivalent, and the exemption amount and rate structure are worth confirming directly with the Washington Department of Revenue given how frequently these figures have been revised.

Arizona's flat 2.5% applies to pension and retirement account withdrawals, income sources Washington doesn't tax at all, so on ordinary retirement income alone, Washington has the clear edge, the same pattern as the Nevada and Texas comparisons. A retiree drawing $150,000 a year from IRA and 401(k) accounts pays roughly $3,750 a year in Arizona tax on that income and nothing in Washington.

Sales tax works against Washington: a 6.5% state rate with local add-ons brings the average combined rate to around 9.4%, among the highest in the country, compared to Arizona's typical combined range of 8% to 9%. For a retiree with substantial annual spending, this offsets a real portion of Washington's income tax advantage, though it doesn't come close to erasing it for a household without significant capital gains or estate exposure.

Property tax runs moderate in Washington, averaging under 1% of assessed value in most counties, in a broadly similar range to Arizona's 0.5% to 0.7%, so this factor is close to neutral between the two states rather than a meaningful tiebreaker.

For military retirees, Washington's blanket no-tax-on-anything approach and Arizona's specific full exemption for military retirement pay produce the same practical result, no state tax on that income source in either state, so the decision again comes down to non-tax factors and the capital gains and estate questions above rather than the retirement pay itself.

The honest way to run this comparison is to separate ordinary retirement income, where Washington is unambiguously the lower-tax state, from capital gains and estate exposure, where Washington can be meaningfully more expensive than Arizona depending on the size of the gain or the estate. A household with no plans for a large capital asset sale and an estate comfortably under Washington's exemption will find Washington the clearly better state on taxes; a household with a business sale on the horizon or substantial appreciated assets should model the 7% capital gains tax explicitly before assuming Washington's reputation applies to their specific situation.

If your income is Social Security, a pension, and standard retirement account withdrawals with no large capital asset sales planned, Washington is genuinely more tax-favorable than Arizona at the state level, worth confirming against your specific numbers rather than assuming the two states are close.

If you're planning to sell a business, a concentrated stock position, or other appreciated capital assets, or your estate is likely to exceed Washington's exemption, model Washington's 7% capital gains excise tax and its estate tax explicitly before relocating; these can outweigh the ordinary-income advantage entirely depending on the size of the transaction or the estate.

• Assuming Washington has no tax of any kind because it has no general income tax; the state's 7% capital gains excise tax and separate estate tax are real, and neither has an Arizona equivalent.
• Not confirming that a planned asset sale, a business, a concentrated stock position, is a type of capital gain actually reached by Washington's tax, since retirement accounts and real estate are excluded.
• Overlooking Washington's state estate tax when comparing the two states purely on income tax grounds; Arizona has no estate or inheritance tax at all.
• Not accounting for Washington's higher-than-average combined sales tax when comparing total cost of living rather than income tax alone.