Key Takeaways

• December 31 is a hard stop, not a suggestion. Roth conversions, charitable transfers, depreciation elections, and tax-loss harvesting must settle or be documented by year-end to count for 2026. Starting in late December turns clean planning into execution risk.

• Arizona's flat 2.5% rate rewards income-shifting more than it first appears. Because the state rate is flat and the long-term capital gains subtraction reduces the effective state rate to ~1.875% on qualifying gains, the question isn't whether state tax applies — it's whether you can time and characterize income to take full advantage of both levers before the year closes.

• The 2026 expansion of Arizona's LTCG subtraction applies to long-held assets regardless of when they were acquired. As of tax year 2026, Arizona's 25% subtraction on net long-term capital gains applies to any qualifying gain regardless of the underlying asset's acquisition date — including long-held real estate, business interests, and securities acquired before 2012. This change should be built into every year-end realization decision.
  
  

For most Arizona high earners, the year-end tax conversation splits into two layers that rarely get evaluated together: the federal layer (brackets, Roth conversion windows, loss harvesting, OBBBA provisions) and the Arizona layer (a flat 2.5% rate, a capital gains subtraction, and favorable retirement-income treatment that no other state quite matches). The families who keep the most are the ones who plan both layers before December 31 — not the ones who optimize the federal picture and treat the state as an afterthought.

This guide is written for Phoenix-area and Arizona-based business owners, founders, retirees, and executives who face variable or concentrated income and want to use what's left of the year before the calendar locks their decisions. By the end, you'll know which moves matter for 2026, how Arizona's rules change the calculus, and where the real planning levers are before December 31.

More Than You Think

Most of your 2026 tax year is already written by October. Wages, realized gains, K-1 income, equity events, and business distributions have largely landed. What's still in your control is when and how the remaining income and deductions sit on one side of December 31 or the other.

That remaining control is the entire point of year-end planning. A deduction placed in the right year can be worth its full value at your top marginal rate; placed in the wrong year — an AMT year, a year where you're already below the itemized threshold — it disappears. A Roth conversion sized correctly fills a bracket efficiently; sized incorrectly it pushes you into a Medicare surcharge two years later.

For Arizona families, the two-layer nature of this analysis is what separates good year-end planning from great year-end planning. Federal decisions ripple into Arizona (Arizona starts from federal AGI), and Arizona-specific subtractions create tax results that federal-only models miss entirely.

The deadlines that close on December 31:

• Roth conversions — must be completed in the calendar year to count for that tax year

• Charitable contributions and DAF funding — cash must leave the account; appreciated securities must transfer

• Tax-loss harvesting — determined by trade settlement, not by intent

• Business capital expenditures for bonus depreciation and §179 — assets must be placed in service

• Deferred compensation elections for next year — must be made before year-end

• Gifts and trust funding — must be completed and documented

Arizona's Tax Profile: What Makes Year-End Planning Different Here

This is the section most national year-end content skips, and it's where the most Arizona-specific value lives. Arizona's tax rules differ from both high-tax states and most flat-tax peers in ways that materially change which year-end moves matter most.

Arizona's key 2026 tax parameters:

• Individual income tax: Flat 2.5% on all taxable income — no brackets, no graduation, no additional surcharge on high income (unlike California's 13.3% or the federal 37% top rate). Confirmed unchanged for 2026 by the Arizona Department of Revenue.

• Long-term capital gains: Arizona allows a 25% subtraction on net long-term capital gains, reducing the effective state rate on qualifying gains to approximately 1.875% (2.5% × 75%). As of tax year 2026, this subtraction applies to all qualifying long-term gains regardless of when the underlying asset was acquired. A prior restriction limiting the subtraction to assets acquired after December 31, 2011 was removed. Investors and business owners holding appreciated positions for many years — including pre-2012 real estate, stock, and business interests — now qualify for this subtraction on the full gain when they sell.

• Short-term capital gains: Taxed at the full 2.5% flat rate (no subtraction).

• Social Security: Fully exempt from Arizona income tax.

• Military retirement pay: 100% exempt from Arizona income tax (since tax year 2021).

• Government pensions: Arizona and federal government pension income qualifies for a subtraction of up to $2,500 per taxpayer.

• IRA, 401(k), and traditional retirement distributions: Fully taxable in Arizona at the flat 2.5% rate — no broad age-based exemption for private retirement account distributions under current law.

• Arizona standard deduction (2026): $16,100 for single filers / $32,200 for married filing jointly / $24,150 for head of household. These reflect the 2026 federal standard deduction amounts, which Arizona tracks.

• State estate tax: None.

• State inheritance tax: None.

• Local/municipal income tax: None — Arizona cities impose no individual income tax.

The local-to-national contrast that matters most: National year-end content typically focuses on the top federal bracket (37%), the net investment income tax (3.8%), and occasionally a high-state-income-tax layer (13.3% in California). For Arizona residents, the combined effective rate on long-term capital gains is 23.8% federal + 1.875% Arizona (effective after the 25% subtraction) = approximately 25.675% total. That is among the lowest combined rates in the country for a state with meaningful income, and it makes the timing of capital gains recognition — including realizing gains before year-end in a low-income year — a particularly high-leverage decision for Arizona families.

The Five Year-End Moves That Matter Most for Arizona Families

1. Time Capital Gains Realizations Around the LTCG Subtraction

For Arizona residents, the long-term capital gains subtraction is the most powerful state-level planning lever — and the 2026 expansion makes it available on a broader set of assets than ever before.

Before 2026, the subtraction applied only to long-term gains from assets acquired after December 31, 2011. Starting with tax year 2026, that acquisition-date restriction was removed. A 68-year-old selling farmland purchased in 1994, or an executive selling stock options issued in 2008, can now claim the 25% subtraction on the resulting long-term gain — a result that would have been unavailable on those specific assets under prior law.

The practical implication for year-end planning: if you're evaluating whether to realize a long-term gain before or after December 31, confirm whether it qualifies for the subtraction, then model the combined 25.675% rate (federal + effective Arizona) rather than the full 26.3% you'd get without the subtraction. And if you're holding a pre-2012 asset you'd previously assumed was ineligible for the Arizona benefit, revisit that assumption.

What can still make it worthwhile to defer: if next year's income will be higher — because of a business sale, large distribution, or other event — the benefit of staying at 1.875% effective Arizona rate may be outweighed by federal bracket pressure. Always model both years together.

2. Manage Roth Conversions to Fill the Federal Bracket Without Triggering Medicare Surcharges

Arizona imposes the same 2.5% rate on Roth conversion income that it imposes on any other ordinary income. There's no Arizona-specific reason to accelerate or defer conversions relative to a resident of a flat-tax peer state — but the federal reasons are just as compelling here as anywhere.

The discipline is sizing. Convert only enough to fill the top of your current federal bracket and stop. For a married couple at the 24% bracket ceiling, every dollar converted beyond that point costs 32 cents federally before Arizona's 2.5% is added — so the bracket edge matters. The secondary guardrail is the two-year Medicare lookback: a larger-than-needed conversion this year can raise your Part B and D premiums in 2028.

Arizona retirees have a specific advantage for Roth conversions: because Arizona doesn't tax Social Security and exempts military retirement entirely, the taxable base for an Arizona retiree is often smaller than it would be in most other states — creating more room within a given bracket to run a partial conversion without stacking it against other taxable income. Model this in October, not December.

3. Harvest Losses Precisely — and Watch the Wash-Sale Window

Tax-loss harvesting reduces your taxable gain dollar-for-dollar at the federal level. At the Arizona level, it reduces the gain subject to Arizona's flat 2.5% rate, including the base on which the 25% long-term subtraction is calculated. On a $50,000 harvested loss, the Arizona tax avoided is $50,000 × 1.875% = $937.50 — small in isolation, meaningful across a multi-year strategy.

The mechanics: losses offset gains first. If losses exceed gains, up to $3,000 of net loss can be deducted against ordinary income annually, with any remainder carried forward indefinitely. The wash-sale rule disallows a loss if you buy a substantially identical security within 30 days before or after the sale — which means a late-November harvest must avoid buying back the same position before late December.

Arizona short-term gains (from assets held one year or less) are taxed at the full 2.5% flat rate with no subtraction. Harvesting losses to offset short-term gains is proportionally more valuable on a per-dollar basis in Arizona than harvesting losses against long-term gains, because the short-term loss avoids the full rate versus only the 1.875% effective rate.

4. Give Appreciated Stock, Not Cash

For Arizona families with charitable intent, the year-end charitable structure matters as much as the amount. Donating long-held appreciated securities directly to a public charity or donor-advised fund erases the embedded capital gain and still delivers a full fair-market-value deduction.

Consider a $250,000 stock position with a $50,000 basis — a $200,000 embedded long-term gain:

Donating directly avoids $51,350 in combined federal and Arizona tax and sends $51,350 more to the charity than a sell-first approach. The Arizona layer ($3,750) is small relative to the federal piece, but it's real — and it disappears entirely when the stock is donated in-kind.

A donor-advised fund lets you take the deduction in 2026 and distribute grants over multiple years, which is useful if your charitable intent spans several causes or timeframes. Funding the DAF before December 31 locks in the 2026 deduction.

5. Business Owners: Lock In Depreciation and §179 Elections

For Arizona business owners with capital expenditures in 2026, the federal OBBBA provisions change the calculation:

• 100% bonus depreciation: Permanent for qualifying assets acquired and placed in service after January 19, 2025. Equipment, machinery, vehicles (over 6,000 lbs. GVWR for autos), and most tangible property with a recovery period of 20 years or less qualifies. Assets must be placed in service by December 31 to count for 2026.

• §179 expensing: For 2026, the expensing limit is $2.56 million (up from the 2025 base of $2.5 million, indexed for inflation), phasing out dollar-for-dollar after $4.09 million in qualifying purchases in service during the year (also indexed, up from the 2025 base of $4 million). Unlike bonus depreciation, §179 cannot create a net operating loss — it's capped by taxable income.

The Arizona conformity note that matters: Many states do not conform to federal bonus depreciation, meaning state depreciation add-backs are required. Arizona's conformity position should be confirmed with your CPA for the specific asset class and tax year — some states conform to §179 but not bonus depreciation, making §179 preferable for assets where you need consistent treatment across both returns.

How the Federal OBBBA Changes Shape Arizona Year-End Decisions in 2026

The One Big Beautiful Bill Act created several provisions that affect how Arizona high earners approach year-end planning. Here's what applies and at what amounts for 2026:

On the SALT cap for Arizona specifically: Most Arizona residents pay 2.5% state income tax plus local property taxes, but no Arizona-level sales tax deduction in most situations (the state has a transaction privilege tax that doesn't always align with the deductible state sales tax category). For a married couple in Scottsdale earning $400,000, their combined Arizona income tax is $10,000 and property taxes might add another $8,000–$12,000. Their total deductible SALT likely falls under the $40,400 cap — meaning the cap itself isn't the binding constraint; the standard deduction ($32,200 MFJ for 2026) is what determines whether they should itemize at all. For Arizona families, the SALT cap matters most to those with very high property values and the income to stay under the $505,000 MAGI phase-down threshold.

Arizona's Retirement-Income Landscape and Year-End Distribution Timing

For Arizona retirees, year-end distribution planning requires understanding which income sources Arizona taxes and which it doesn't.

Arizona treatment of retirement income:

• Social Security: Fully exempt — zero Arizona income tax regardless of amount

• Military retirement: 100% exempt

• Federal/Arizona government pensions: Eligible for up to $2,500 subtraction per taxpayer

• IRA and 401(k) withdrawals: Fully taxable at 2.5% flat rate — no special age-based exemption under current law

• Roth IRA qualified distributions: Not taxable (distributions come out tax-free, same as federally)

• Required minimum distributions: Taxable at 2.5% in the year distributed

The RMD-timing implication for year-end: because RMDs from traditional IRAs are taxable, some Arizona retirees choose to accelerate discretionary IRA withdrawals in years when their income is below a bracket threshold, paying 2.5% Arizona tax but avoiding pushing income into a federal bracket cliff. Others use qualified charitable distributions (for those age 70½ or older) to direct IRA funds to charity without the amount ever hitting Arizona taxable income, since Arizona conforms to the federal QCD exclusion from gross income.

The Roth conversion window: For Arizona retirees in the years between stopping work and starting RMDs (typically the window between age 60 and 73), the combined federal-and-Arizona tax on a partial Roth conversion is lower than it will be once Social Security, RMDs, and other retirement income stack together. The Arizona flat rate (2.5%) is the same in every year, but the federal bracket math changes significantly in the years before required distributions begin.

A Worked Example: Scottsdale Retiree Planning for a Gain and a Conversion

A 67-year-old Scottsdale retiree, married, with $650,000 in household income (Social Security, pension, and investment income) is considering selling a long-held investment property purchased in 1998 with a $200,000 basis, now worth $600,000 — a $400,000 embedded long-term gain. She also holds $1.2 million in a traditional IRA and is two years away from RMDs at 73.

The Arizona LTCG subtraction applies to this gain. Even though the property was acquired in 1998 (before the pre-2026 rule's December 31, 2011 cutoff), the 2026 expansion removes that restriction. The gain fully qualifies for the 25% subtraction.

In the same year, she also runs a $50,000 Roth conversion to partially fill her 24% federal bracket before the property sale income pushes her further up. The Arizona cost on that conversion: $50,000 × 2.5% = $1,250.

Year-end coordination note: the Roth conversion must be documented and completed before December 31. The property sale must close and settle before December 31 for the gain to land in the 2026 tax year. Both decisions should be modeled in October or November — running them in December leaves no margin for execution delays.

These figures are illustrative only. Individual results depend on the full income picture, exact filing status, and 2026 law in effect at the time of the transaction.

Arizona Year-End Checklist for High Earners and Retirees

Use this before December 31 to confirm nothing is left on the table:

Income and bracket management

• Project full 2026 income — wages, distributions, realized gains, K-1s

• Identify federal bracket edges and NIIT threshold relative to projected MAGI

• Model a partial Roth conversion to fill (not overflow) your current bracket

• Evaluate whether to accelerate or defer any discretionary income between 2026 and 2027

Capital gains and LTCG subtraction

• Identify all long-term gains planned for realization; confirm each qualifies for the Arizona 25% LTCG subtraction (any asset held more than one year qualifies as of 2026, regardless of acquisition date)

• Identify harvestable losses to offset gains; model on the full combined 25.675% rate for net long-term gains

• Short-term gains are taxed at the full 2.5% — offsetting them with losses saves proportionally more per dollar than offsetting long-term gains

Charitable giving

• Identify appreciated securities with long-term gains to donate in-kind rather than cash

• If bunching charitable gifts, fund the donor-advised fund before December 31

• If age 70½+, evaluate qualified charitable distributions from the IRA to satisfy charitable intent without adding to taxable income

Retirement distributions

• Take any required minimum distributions before December 31 (RMDs cannot be converted to Roth)

• Confirm any Roth conversion settles before December 31

• Verify IRA withholding covers the resulting Arizona and federal tax

Business owners

• Confirm all qualifying capital equipment is placed in service before December 31 for bonus depreciation

• Model §179 election vs. bonus depreciation (2026 §179 limit: $2.56M, phase-out begins at $4.09M)

• Confirm Arizona's conformity position for bonus depreciation with your CPA

Estate and gifting

• Complete any annual exclusion gifts ($19,000 per recipient in 2026; $38,000 for married couples gift-splitting)

• Confirm beneficiary designations on IRAs, 401(k)s, and insurance are current

• Fund any planned irrevocable trust contributions before year-end

FAQ: Year-End Tax Planning for Arizona High Earners

Does Arizona tax Social Security or military retirement? No. Both are fully exempt from Arizona income tax regardless of income level. Social Security has been exempt under Arizona law for years, and military retirement became 100% exempt starting with tax year 2021. Arizona government and federal government pensions qualify for a subtraction of up to $2,500 per taxpayer.

What is Arizona's standard deduction for 2026? Arizona tracks the federal standard deduction. For 2026, the amounts are approximately $16,100 for single filers and $32,200 for married filing jointly. These reflect the 2026 federal figures (up from $15,750/$31,500 in 2025). Confirm the final AZDOR-published 2026 figures before filing, as Arizona may need to issue conformity guidance. Itemizing beats the standard deduction only when your deductible SALT, mortgage interest, charitable gifts, and other allowable items exceed these amounts in total.

Does Arizona's LTCG subtraction now apply to assets acquired before 2012? Yes. This is a significant 2026 change. Arizona's 25% long-term capital gains subtraction previously applied only to assets acquired after December 31, 2011. Starting with tax year 2026, that acquisition-date restriction no longer applies — the subtraction is available on any qualifying long-term gain regardless of when the underlying asset was acquired. An Arizona seller with a long-held pre-2012 real estate position or legacy stock position should model the subtraction into their 2026 gain calculation.

What is the combined federal and Arizona effective rate on long-term capital gains for a high earner in 2026? For a taxpayer in the top federal bracket with gains subject to the 20% long-term capital gains rate plus 3.8% NIIT, the combined rate is 23.8% federal plus approximately 1.875% effective Arizona (after the 25% subtraction) — approximately 25.675% total. This is among the lowest combined rates in the country for any state with a meaningful income tax, making Arizona a favorable jurisdiction for long-term capital gains realizations.

Should I defer or accelerate income before December 31? It depends on your bracket outlook. Deferring makes sense if next year's income will be lower — pushing gain or ordinary income into a year where less federal tax applies. Accelerating makes sense if next year will be higher — perhaps because of a business sale or large distribution. Since Arizona's rate is flat at 2.5%, bracket management at the state level is less significant than at the federal level, where the bracket edges (24% to 32%, 32% to 35%, etc.) represent much larger jumps.

What did the OBBBA change that matters for Arizona year-end planning? Three things stand out. First, the SALT deduction cap is $40,400 for 2026 (indexed 1% annually from the $40,000 2025 base), phasing down by 30 cents per dollar of MAGI above $505,000 in 2026, before reverting to $10,000 in 2030 — for most Arizona families, this primarily affects property tax deductibility. Second, 100% bonus depreciation is now permanent for qualifying assets acquired and placed in service after January 19, 2025 — business owners should place capital equipment in service before December 31. Third, the §179 expensing limit for 2026 is $2.56 million, phasing out after $4.09 million in qualifying purchases placed in service during the year (both indexed for inflation from the 2025 base amounts of $2.5M/$4M).

Is it better to take IRA distributions now or wait until required minimum distributions start at 73? For most Arizona retirees with other taxable income, the years between retiring and the start of RMDs at 73 are the optimal window for strategic withdrawals. You control the size of each withdrawal, keeping income in a lower federal bracket and paying the flat 2.5% Arizona rate on the distribution. Once RMDs begin, you're required to take a minimum amount regardless of other income in that year — which can push you into a higher federal bracket, increase the taxable portion of Social Security, and trigger IRMAA Medicare surcharges. The short answer: voluntary withdrawals or Roth conversions during the pre-RMD window are generally more efficient than forced distributions later.

Why coordinate my CPA, financial advisor, and estate attorney together before year-end? Because year-end decisions touch investments, retirement accounts, payroll, gifting, and estate documents simultaneously, and an uncoordinated move in one area can create an unintended consequence in another. A Roth conversion that spikes MAGI can reduce your SALT benefit, your ACA subsidy, or your Medicare premium. A charitable gift made as cash rather than stock misses a capital-gains savings opportunity. A depreciation election that's optimal federally might create a state add-back. Reviewing all decisions together — in October or November — lets each move reinforce the others rather than compete.

Ready to Review Your 2026 Arizona Tax Position?

The moves that matter most for Arizona high earners before December 31 are not complex — but they're time-sensitive, they interact with each other, and the Arizona-specific levers (the LTCG subtraction, the flat rate, the retirement-income exemptions) require knowing which rules now apply in 2026 and which have changed. If your year includes a gain realization, a Roth conversion window, a business capital expenditure, or a charitable gift of appreciated securities, those decisions should be modeled in the next few weeks — not in late December.

Endeavor Advisors coordinates the full Arizona year-end picture for high-net-worth families across the Phoenix, Scottsdale, and Tucson areas, integrating the federal and state tax layers, investment management, and estate planning into a single year-end review.

Start a conversation with Endeavor Advisors before December 31.