Does Arizona Have An Inheritance Tax?

Any Arizona resident who has recently received an inheritance may be asking, “Does Arizona have inheritance tax?” The simple answer to this question is, “No.” Although there used to be an Arizona inheritance tax, Governor Napolitano signed a bill to permanently remove all inheritance, gift, and estate tax requirements from Arizona state laws in 2006, according to The American College of Trust and Estate Counsel. However, the elimination of those requirements does not eliminate the possibility that an Arizona resident’s estate or inheritance may be subject to other taxes. If you are wondering how you may be affected by inheritance taxes or have other questions about estate planning or inheritances, consider contacting an experienced estate planning attorney at Harrison Law, PLLC by calling (480) 320-2310 to schedule a consultation.

Do I Have To Pay Taxes on Money I Inherit From My Parents?

Although there is no inheritance tax in Arizona, there are certain circumstances that may require Arizona residents to pay taxes on the money or other assets they inherit, even from their parents. These taxes can include:

• Inheritance taxes paid to another state
• Estate taxes paid to another state
• Estate taxes paid to the federal government
• Income tax on retirement accounts
• Income tax on income-earning assets
• Income tax on annuities

Inheritance Taxes Paid to Another State

An inheritance tax is a tax that applies to inherited assets and that must be paid by the beneficiary. The residency of the deceased, rather than the beneficiary, is what determines whether an inheritance will be taxed, as in the following two examples:

• If an Arizona resident’s parents lived in Arizona (or another state without an inheritance tax), he or she would not have to pay taxes on the inheritance
• If an Arizona resident’s parents lived in a state that has an inheritance tax, he or she may receive a tax bill from that state after receiving the inheritance

The states that do charge an inheritance tax are Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. The percentage of inheritance tax that a person is required to pay varies depending on the amount of the inheritance and the rate charged by the state in which the deceased lived. Some states also provide an exemption for inheritances that are under a threshold amount.

Estate Taxes Paid to Another State

An estate tax is a tax charged on the transfer of a deceased person’s estate. The value of an estate is calculated after all debts have been paid and is reduced by the amount of estate tax owed. While estate taxes are not paid directly by the beneficiaries, they reduce the total value of the assets that are available when the transfer occurs. The following eleven states and Washington, D.C., impose an estate tax on their residents’ estates:

• Connecticut
• Hawaii
• Illinois
• Maine
• Massachusetts
• Minnesota
• New York
• Oregon
• Rhode Island
• Vermont
• Washington

Arizona does not charge an estate tax. However, if a person’s parents lived in one of the states above, this tax would apply to their estate upon its transfer to the beneficiary.

Estate Taxes Paid to the Federal Government

According to the Code of Federal Regulations, the federal government imposes a federal estate tax on the transfer of a deceased person’s estate. This tax is subject to an exemption of $10 million for individuals and $20 million for married couples. The exemption amount is adjusted according to inflation each year and is set at $12.06 million for individuals and $24.12 million for married couples for 2022. What this means is that an estate would only be taxed if it is worth more than that amount. The value of an estate is calculated after debts have been paid and is based on the current market value rather than the original purchase price.

Income Tax on Retirement Accounts

A retirement account can take the form of an IRA, a 401(k), or a 403(b) plan. A beneficiary of a retirement account is required to pay income tax at his or her ordinary tax rate, which is determined by income and the state of residence. If you inherit a retirement account, you would be charged income tax only as you withdraw from the account, which means that you can delay tax liability and payment.

Income Tax on Income-Earning Assets

Income-earning assets include rental properties, stocks, bonds, CDs, and any other accounts that earn interest or dividends. Income tax is imposed on these types of assets during the administration of an estate. If you inherit any of these types of assets, this tax liability would be passed on to you as the beneficiary.

Income Tax on Annuities

An annuity is an investment that is paid out as a fixed income stream after a specified period. A beneficiary who inherits an annuity may be required to pay income tax on the amount by which the value of the annuity has increased over its lifetime.

While there is no Arizona inheritance tax, the types of assets a person inherits can affect his or her tax liability. If you have questions about inheritance or estate taxes, an experienced estate planning attorney at Harrison Law, PLLC may be able to help.

How Much Can You Inherit From Your Parents Without Paying Taxes?

Based on state and federal tax rules in 2022, a person may inherit up to $12.06 million without paying taxes, provided that the deceased was a resident of Arizona or another state that does not impose an inheritance tax. If the deceased was a resident of a state that imposes an inheritance or estate tax, these taxes may need to be paid to that state. Differing tax rates and thresholds for exemptions in each state will determine if and how much tax will need to be paid.

What Do I Need To Consider in Relation to My Inheritance?

If you are expecting to receive an inheritance after the death of a loved one, there are three main things to consider:

• Tax laws
• Validity of the will
• Probate

Tax Laws

Although there is no Arizona inheritance tax, it is possible that a beneficiary may be required to pay certain taxes on his or her inheritance. In addition, state and federal tax returns for the deceased person must be filed by the tax deadline of the year after the death occurred. A skilled estate planning attorney can help by explaining the tax liabilities a person may face and any other requirements that must be met by the executor and/or the beneficiaries of an estate.

Validity of the Will

Arizona laws related to last wills and testaments (wills) and estates are found in Title 14 of the Arizona Revised Statutes. These laws also outline the requirements for a will to be considered valid and legal in the state of Arizona. If a person in Arizona dies without a will or if his or her will is invalid, the death is considered “intestate.” Arizona’s intestate laws automatically assign a deceased person’s property to his or her closest relatives. This may be the person’s spouse, children, siblings, grandparents, or other extended family members. If the deceased person has no relatives, his or her property will be taken over by the state.

Probate

Probate is the legal process for assessing the validity of a will and administering an estate. Probate is required in Arizona except in cases where the deceased person has a trust or has beneficiaries appointed for all assets owned. There are also certain assets that are not subject to the probate process under Arizona law, including:

• Small estates valued at less than $100,000 in real property and less than $75,000 in personal property
• Real estate that is owned jointly by a married couple when the deceased person’s spouse is still living
• Bank accounts, retirement accounts, and insurance plans with beneficiaries

Given these considerations, it is possible to minimize the time and cost of the probate process with a carefully prepared estate plan.

Contact an Estate Planning Attorney Today

Although there is no longer an Arizona inheritance tax, an Arizona resident may have to pay tax on an inheritance. Whether you wish to create an estate plan that will help your loved ones avoid taxes or are the beneficiary of an inheritance, an experienced estate planning attorney can guide you based on your unique circumstances. Consider contacting a skilled estate planning lawyer at Harrison Law, PLLC by calling (480) 320-2310 to learn more.

© 2022 Matthew W. Harrison and Harrison Law, PLLC All Rights Reserved

This website and article have been prepared by Harrison Law, PLLC for informational purposes only and does not, and is not intended to, constitute legal or financial advice. The information is not provided in the course of an attorney-client relationship and is not intended to substitute for legal advice from an attorney licensed in your jurisdiction.