Arkansas Retirement Tax Friendliness

Arkansas Retirement Taxes

Arkansas is a mid-sized state, with a population of about three million people. Retirees living in Arkansas enjoy relatively low taxes, especially on income and property. The state does not tax Social Security, and its property taxes are among the lowest in the U.S. Though sales taxes, on the other hand, are high.

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Is Arkansas tax-friendly for retirees?

Arkansas is a relatively tax-friendly state for retirees. Social Security is totally exempt from the state’s income tax. Arkansas also offers seniors a deduction of $6,000 for other types of retirement income like from pensions or an IRA. While the state sales taxes are some of the highest in the country, that is at least partly offset by property taxes that rank among the lowest in the U.S.

Is Social Security taxable in Arkansas?

While Arkansas does have a state income tax, it does not apply to Social Security income.

Are other forms of retirement income taxable in Arkansas?

Yes, but they may also be eligible for an exemption. Specifically, for persons age 59.5 or older, income from pensions or retirement accounts qualifies for an exemption of up to $6,000.

That deduction applies to the combined total from all accounts and pensions, so if you have income from both a 401(k) and a public pension, you can still only claim one deduction of up to $6,000. Married couples who both have retirement income can claim the deduction twice, one for each person’s retirement income. Retirement income above that deduction is taxed at the normal income tax rates, shown in the table below.

How high are property taxes in Arkansas?

Property taxes in Arkansas are quite low. Homeowners here typically pay about $878 annually, one of the lowest amounts in the country. One reason for this is that home values in Arkansas are below-average compared to the rest of the country. In fact, the median home value in the state is $142,100, almost $140,000 lower than the national median.

What is the Arkansas homestead exemption?

In Arkansas, the homestead exemption is called a homestead tax credit. It is equal to up to $375 per year and may be claimed on a homeowner’s principal place of residence. Any homeowner living in his or her principal place of residence may claim the credit, including seniors. Retirees who live in a nursing center or retirement home but also own their own home may still claim the credit.

How high are sales taxes in Arkansas?

Sales taxes in Arkansas are high. The rate at the state level is 6.5%. And, local jurisdictions can also impose a sales tax up to 6.125%.

That does not apply to all purchases. Some items that are especially important to seniors are exempt, including prescription drugs and all durable medical equipment like wheel chairs or prosthetic limbs. Groceries are subject to a lower state sales tax of 0.125%.

What other Arkansas taxes should I be concerned about?

One tax seniors should be aware of in Arkansas is the capital gains tax. If you have investments in assets outside of a retirement account and they gain value, keep in mind you will pay income taxes on most of those gains.

Capital gains are taxed as regular income in Arkansas, but receive an exemption of 50%. Additionally, net capital gains over $10 million in a tax year are exempt of state income tax.

On the other hand, Arkansas does not have an estate or inheritance tax. Retirees hoping to pass on some of their wealth to the next generation can do so tax-free, at least at the state level.