Arizona Tax Guide 2026

The 2.5% flat tax — fully phased in

Arizona moved from a 4-bracket structure (top 4.5%) to a flat 2.5% via SB 1828 of 2021, accelerated to full implementation in 2023 (originally scheduled for 2025). A.R.S. §43-1011 codifies the flat 2.5% rate on all taxable income, regardless of filing status or income level. 25% LTCG subtraction: A.R.S. §43-1022(29) lets residents subtract 25% of net long-term capital gain on assets acquired AFTER December 31, 2011 — making the effective AZ rate on qualifying LTCG = 2.5% × 75% = 1.875%. Federal-conformity standard deduction: $15,000 single / $30,000 MFJ for 2026 (Arizona conforms to federal SD under SB 1828 reforms). Personal exemption: $2,300 single + dependents. No state-level QBI conformity. Foreign tax credit not allowed (FTC at federal level only).

Transaction Privilege Tax (TPT) — Arizona's sales-tax equivalent

Arizona doesn't have a true 'sales tax' — it has the TPT (A.R.S. Title 42, Ch. 5) imposed on the SELLER for the privilege of doing business. In practice it passes to the buyer like sales tax, but legal nuances matter: the seller can choose to absorb it or pass it through (most pass through). State TPT: 5.6%. Cities and counties add additional TPT: • Phoenix: 2.3% city → 8.6% combined (some classifications) • Tucson: 2.6% city → 8.7% combined • Scottsdale: 1.75% → 8.05% • Flagstaff: 2.281% → 8.881% • Mesa: 2.0% → 8.3% Different rates apply to different classifications: retail, contracting (prime contractor 5.6% state + city), restaurants/bars, hotels (transient lodging), and others (16 different state classifications). Economic nexus (post-Wayfair, A.R.S. §42-5044): $100,000 in cumulative gross sales (no transaction count). Marketplace facilitator: A.R.S. §42-5043.

Property tax

Statewide average effective ~0.62% — among the lower US rates. Maricopa County (Phoenix metro) ~0.62%, Pima (Tucson) ~0.81%, Pinal ~0.69%, Yavapai (Prescott/Sedona) ~0.55%. Property taxes are limited by Proposition 117 (2012): the assessed value used for primary (most local taxes) cannot increase more than 5% per year, regardless of market appreciation. This significantly compresses effective rates over time. Personal property of businesses is taxed; AZ exempts the first $264,755 (2026 est., inflation-indexed under A.R.S. §42-11127) of business personal property per taxpayer.

Pass-Through Entity Tax (PTET)

AZ PTET (A.R.S. §43-1014, enacted 2022) lets S-corps and partnerships elect to pay 2.5% AZ tax at the entity level. Owners receive a REFUNDABLE AZ credit equal to their distributive share of PTET paid. Election: made annually on the entity return, due April 15 for calendar-year filers. Once elected, irrevocable for the year. Federal deduction at entity level (above SALT cap) — modest benefit because rate is only 2.5%, but still meaningful for high-K-1 partners. A federal high-earner ($1M K-1 income, 37% bracket) paying $25,000 of AZ tax via PTET vs personally saves: 37% × $25,000 = $9,250 federal benefit per year.

Self-employed and small business considerations

LLC formation: $50 state filing + publication requirement (must publish formation notice for 3 consecutive weeks in an approved newspaper in Apache, Coconino, La Paz, Mohave, Navajo, Pima, Santa Cruz, Yavapai, and Yuma Counties — Maricopa and Pinal residents are exempt from publication). Publication cost: $80–$300 depending on county. No annual report fee for LLCs (Arizona is one of the few states with no annual LLC fee). Self-employed Arizonans face TPT registration requirements if they sell tangible personal property or perform contracting work. Pure professional services (legal, accounting, consulting) are largely TPT-exempt. Unemployment tax: 1.5%–13.5% on first $8,000 wage base. No state DI/PFML. Arizona is a friendly state for self-employed at scale: 2.5% flat + 25% LTCG subtraction + no city income tax + low property tax. The TPT burden is only material for sellers of taxable goods/services.

Worked example: Diego Ramirez, Phoenix-based real estate investor (single, 2026)

Diego sells a long-held Scottsdale rental property in 2026 for $850,000 (basis $400,000) → $450,000 LTCG. Also W-2 wages $140,000 from his day job.

Federal: LTCG taxed at 20% bracket + 3.8% NIIT on portion above MAGI threshold. Arizona: W-2 income: $140,000 LTCG (acquired post-2011): $450,000 25% LTCG subtraction (A.R.S. §43-1022(29)): -$112,500 Adjusted gross AZ income: $140,000 + $337,500 = $477,500 Less standard deduction: $15,000 Taxable income: $462,500 AZ tax at 2.5%: $11,562 For comparison, the same scenario in California would generate ~$50,000+ of state income tax (CA doesn't conform to §1031 in same way + 13.3% on top dollar of high earners). Property tax (Scottsdale, $850k → ~$5,270/yr based on full-cash value ~0.62%) — separate, ongoing burden.

Statute references

• Flat personal income tax 2.5% — A.R.S. §43-1011
• 25% long-term capital gains subtraction — A.R.S. §43-1022(29)
• Pass-Through Entity Tax (PTET) — A.R.S. §43-1014
• Transaction Privilege Tax — A.R.S. Title 42, Chapter 5
• TPT economic nexus (Wayfair) — A.R.S. §42-5044
• Property assessed value 5% cap — Ariz. Const. Art. 9 §18 (Prop 117, 2012)
• Corporate income tax — A.R.S. §43-1111

Related pages

• State Tax Comparison →
• Capital Gains Tax →
• PTET Analyzer →