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Arizona named No. 5 tax-friendly state for retirees

If your retirement is impending, Arizona is one of the best states in which to settle down — as far as taxes go.

Kiplinger, a personal finance site, recently published a list of the most tax-friendly U.S. states in which to retire, as featured on Yahoo! Finance.

Arizona placed very high on the list, coming in at No. 5. Kiplinger said the top states all exempt Social Security benefits from state taxes, and many of the best also exempt at least a portion of other retirement income, such as pensions. The financial site also looked at states’ capital gains tax rates in its analysis.

Here’s Kiplinger’s rationale for why Arizona placed so high.

The Grand Canyon State has an income tax, although it is relatively low compared with other states. But Social Security benefits are exempt, as is up to $2,500 of some other retirement income. The state’s top income tax rate doesn’t kick in until income hits $150,000 ($300,000 for married couples).

Kiplinger also pointed out that property tax rates vary considerably from one area to another in the state, but it cites the Tax Foundation in saying that Arizona has, on average, some of the lowest property taxes in the nation. According to the Tax Foundation, the median property tax on a $187,700 median-valued home in the Grand Canyon State is $1,356.

Arizona probably would be ranked even higher if some of its communities didn’t have such high local taxes. Kiplinger said the statewide tax of 5.6 percent can climb to as high as 12 percent when combined with local taxes in certain areas. However, it notes that food for home consumption and prescription drugs are exempt from state sales tax.