Does Arizona Collect Estate or Inheritance Tax?
Arizona residents do not need to worry about a state estate or inheritance tax. Arizona does not have these kinds of taxes, which some states levy on people who either owned property in the state where they lived (estate tax) or who inherit property from someone who lived there (inheritance tax).
Even though Arizona does not collect an inheritance tax, however, you could end up paying inheritance tax to another state. If you inherit from somone who lived in one of the few states that has an inheritance tax--Iowa, Kentucky, Nebraska, New Jersey, or Pennsylvannia--you may get a tax bill from that state. It will be based on the value of what you inherited and how closely related you were to the deceased person. Surviving spouses don't have to pay inheritance tax, and some states exempt small inheritances. But it's still a tax bill that you probably weren't expecting.
There could also be a federal estate tax bill, but only if the deceased person left millions in assets. The federal estate tax comes out of the estate of the person who died. But very few estates--an estimated two out of every 1,000--owe federal estate tax. That's because there is an basic exemption of $5 million, which is indexed to inflation and is currently $5,450,000. Only the estates of people who die with assets worth more than that exemption will have to pay estate tax.
If someone dies in Arizona with less than the exemption amount (currently $5,450,000), their estate doesn't owe any federal estate tax, and there is no Arizona estate tax. The heirs and beneficiaries inherit the property free of tax.
They don't pay income tax on inherited assets, either, because inherited property is not what the IRS calls "ordinary income." The only exception to this are inherited retirement accounts, which are subject to income tax as the assets are withdrawn.
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