New Mexico's Social Security exemption is relatively new and income-gated, a meaningful departure from Arizona's unconditional exemption. Since 2022, Social Security benefits are fully exempt from New Mexico tax as long as income stays below $100,000 for single filers, $150,000 for married filing jointly, or $75,000 for married filing separately. Above those thresholds, benefits become taxable under New Mexico's regular rules, the same federal inclusion formula still applies first, and whatever portion is federally taxable can also become state-taxable if income exceeds the New Mexico threshold.

This income-based structure is worth planning around actively, since it functions somewhat like a cliff for households near the threshold. A retiree with income just above $100,000 (single) loses the exemption on the entire Social Security benefit, not just the amount above the threshold, making careful income management in years close to that line meaningfully valuable, particularly for a household deciding whether to do a Roth conversion or take an unusually large IRA withdrawal in a given year.

Pension income and retirement account withdrawals are taxed under New Mexico's graduated bracket structure, running from 1.5% at the bottom to 5.9% at the top, applying above roughly $315,000 for single filers, with the exact thresholds adjusted periodically. For taxpayers 65 and older, a deduction of up to $8,000 applies against taxable retirement income such as pension and IRA distributions, a genuine, if modest, offsetting benefit that reduces the effective rate somewhat for retirees in this age group.

Military retirement pay is fully exempt in New Mexico, similar to Arizona's treatment, along with pension income from the state's own Public Employees Retirement Association (PERA) and Educational Retirement Board (ERB) plans, which cover New Mexico's state and local government employees and public school teachers. This makes New Mexico a genuinely favorable state for its own retired public employees and for military retirees generally, even though other retirement income sources face the state's regular graduated rates.

New Mexico's overall tax structure includes a notable feature beyond the income tax: a gross receipts tax, New Mexico's version of a sales tax, but levied on businesses rather than directly on consumers, though typically passed through in prices, that runs higher than a typical state sales tax in many areas, worth factoring into a full cost comparison rather than looking at the income tax rate alone.

For a retiree comparing New Mexico against Arizona specifically, the practical difference depends heavily on total income level: households staying under New Mexico's Social Security threshold and within its lower brackets can find the two states landing relatively close together, especially once the 65+ deduction is applied, while households with substantial IRA, 401(k), or pension income above New Mexico's lower brackets typically find Arizona's flat 2.5% meaningfully lower.

New Mexico's relatively recent expansion of its Social Security and retirement income breaks, the exemption dates only to 2022, means some older online guides, calculators, and even some tax preparers unfamiliar with the change still describe New Mexico as taxing Social Security outright with no exemption at all. That's no longer accurate for the large majority of retirees whose income falls under the current thresholds, and it's worth confirming with a source that reflects the post-2022 rules rather than an older article still circulating.

State tax in New Mexico is only one part of a full relocation or retirement-planning decision. Property tax rates in New Mexico run moderate by national standards, and the state's overall cost of living, particularly outside Santa Fe and parts of Albuquerque, tends to run lower than Arizona's more expensive metro areas. For a retiree whose income comfortably clears New Mexico's thresholds and brackets, these non-tax factors can matter as much as, or more than, the income tax comparison itself.

Neither state has an estate or inheritance tax. For a household weighing New Mexico purely on the numbers, the most reliable approach is running actual projected Social Security, pension, and IRA or 401(k) withdrawal figures against New Mexico's specific thresholds and brackets rather than relying on a general reputation for the state as either especially tax-friendly or especially tax-heavy for retirees, since the truth depends heavily on the specific household's income mix and level.

If your income is near New Mexico's $100,000 (single) or $150,000 (married filing jointly) Social Security threshold, model any large one-time income event, a Roth conversion, an unusually large IRA withdrawal, a capital gain, carefully before assuming it won't affect your Social Security taxation. Crossing the threshold can make the entire benefit taxable, not just the amount over the line.

If you're a retired New Mexico public employee (PERA or ERB) or a military retiree, confirm your specific pension is correctly coded as exempt on your return, this is a real, valuable exemption that's sometimes missed by preparers unfamiliar with New Mexico's specific public-pension rules.

• Assuming Social Security is exempt in New Mexico regardless of income, the exemption phases out entirely above $100,000 single / $150,000 married filing jointly income.
• Not planning around the Social Security exemption's cliff structure when deciding whether to do a Roth conversion or take a large withdrawal in a given year.
• Missing the $8,000 retirement income deduction available to taxpayers 65 and older, a real benefit that reduces the effective rate on pension and IRA income for this age group.
• Not confirming that a PERA, ERB, or military pension is coded correctly as exempt, since these specific carve-outs are sometimes missed by preparers unfamiliar with New Mexico's rules.