A smiling attorney in a black suit hands a legal document to a couple while guiding them on inheritance tax laws in Arizona.

Tax considerations are very important when closing out an estate. If you recently lost a loved one and expect to receive any of their assets, you may be wondering whether there is an inheritance tax in Arizona. Estate and inheritance tax laws vary by state, and individuals must also comply with federal estate tax laws. If you need help understanding how taxes may impact your inheritance, the experienced estate planning attorneys at Pennington Law, PLLC have the answers you need.

With decades of experience assisting Arizona clients with comprehensive estate planning and wealth management, our esteemed lawyers can explain the various tax laws that may apply to your situation in simple terms. Call or contact us today for a free consultation.

Does Arizona Have an Inheritance Tax?

Arizona does not impose a gift, inheritance, or estate tax on residents. However, if you inherit property from someone who died in a state with an inheritance tax, the state might tax your inheritance based on your relationship to the deceased.

As of 2024, six states impose inheritance taxes, including:

  • Iowa
  • Nebraska
  • Maryland
  • Pennsylvania
  • New Jersey
  • Kentucky

At Pennington Law, PLLC, we can help you understand how another state’s inheritance tax laws apply to your situation based on the type of property you inherited and whether you might be exempt based on your relationship with the person who passed away.

Inheritance Tax vs. Estate Tax: Why Arizona Stands Out

Some states impose either an estate tax or an inheritance tax, or both. An estate tax levies taxes on the total value of a deceased person’s estate before the distribution of any assets. The estate tax (also called a death tax) is paid from the estate’s funds. An estate may have an estate tax liability if the decedent resided or owned property in a state that imposes estate taxes.

By contrast, an inheritance tax requires the heir or beneficiary of an estate to pay tax on the value of the assets they receive from the decedent’s estate. The state of the decedent’s residence determines whether beneficiaries or heirs must pay inheritance taxes.

Arizona stands out from states that impose estate or inheritance taxes by not requiring estates or heirs/beneficiaries to pay a portion of the estate’s value to the Arizona treasury. This means Arizona residents may protect more of their family wealth and not lose a portion to taxes.

Potential Tax Liabilities for Arizona Residents

Although Arizona does not impose estate or inheritance taxes, residents may face other taxes upon the transfer of assets following a decedent’s death. First, the federal government imposes estate taxes for estates with values that exceed a certain threshold, adjusted annually for inflation. Estates with values that fall under the threshold benefit from an estate tax exemption.

Federal law also allows spouses to combine their federal estate tax exemptions in a process called portability. A surviving spouse may assume the unused portion of their deceased spouse’s estate tax exemption and combine it with their exemption. This strategy can offer tax savings and benefits but requires the estate’s personal representative (executor) to submit paperwork to the Internal Revenue Service (IRS). An estate planning attorney can advise on the advantages and drawbacks of portability.

Again, Arizonans may be subject to inheritance tax liabilities only if they inherited property from someone who lived in a state that levies inheritance taxes and meet other criteria based on that state’s inheritance tax laws.

Other Tax Considerations When Inheriting in Arizona

Arizona residents who inherit from loved ones or people who inherit property in Arizona may have other tax considerations beyond estate or inheritance taxes. Common potential tax implications of inheritances in Arizona include:

  • Capital gains taxes – Arizona and the federal government impose capital gains taxes on the growth in value of any asset when sold by its owner. People may incur capital gains taxes when they sell inherited assets like real estate or stocks. However, an heir or beneficiary receives a stepped-up basis in an inherited asset, with the growth in value of the asset based on the asset’s value on the date they inherited it rather than the date the decedent acquired it.
  • Income tax on retirement accounts – A person who establishes a tax-advantaged retirement account typically pays taxes only as they withdraw money. An individual who inherits a loved one’s retirement account will similarly become liable for income taxes if they withdraw from the account. However, with taxes imposed on withdrawals, beneficiaries can delay tax liabilities. In some circumstances, people who inherit retirement accounts may roll over the assets in those accounts into their retirement accounts.
  • Taxes on income-generating assets – Individuals may inherit income-generating assets, such as income real estate (e.g., apartment or commercial buildings), dividend stocks, bonds, and CDs. Heirs or beneficiaries will become responsible for taxes on the income generated by the asset.
  • Income taxes on annuities – An Arizona resident who inherits an annuity from a loved one may incur income taxes if they withdraw or receive money. The tax an heir or beneficiary pays on the income they receive from an annuity will depend on whether the decedent who created the annuity paid taxes on the contributions they made to the annuity. Pre-tax contributions will result in an heir or beneficiary paying taxes on the entire distribution. Otherwise, they may only owe taxes on the portion of a distribution representing the annuity’s earnings.

Contact a Skilled Estate Planning Attorney Today

Tax planning is a crucial part of comprehensive estate planning. Even though there is no Arizona inheritance tax, you can implement various legal tools in a customized estate plan to maximize tax savings and minimize liabilities. The end result: You protect your wealth and other assets to provide the kind of legacy you want for your family.

At Pennington Law, PLLC, we value family. A father of six, firm founder Andre Pennington is passionate about crafting custom solutions that help Arizonans protect those they love most. If you live in Surprise, Sun City West, Buckeye, Peoria, or the surrounding areas, turn to our award-winning law firm for advice on securing your wealth. Contact Pennington Law, PLLC today for a free consultation with an AZ estate planning lawyer.