11 Nov Do I Need to Pay Tax on My Inheritance in Arizona?

Inheriting assets from a loved one, no matter how small, can be both a blessing and a curse. One of the many questions that may arise when trying to navigate the complex process of settling an estate in Arizona is whether or not you have to pay tax on an inheritance. While there is no Arizona inheritance tax law, you may or may not be exempt from an inheritance tax based on federal law.

What Are Inheritance Taxes?

Inheritance taxes are imposed on the assets a beneficiary receives from the estate of a deceased person. These differ from estate taxes, which are paid by the estate itself before the distribution of assets. When it comes to inheritance taxes, the beneficiary foots the bill.

Fortunately, the threshold for the federal inheritance tax exemption is extremely high, so most estates are not subject to inheritance taxes. And because Arizona doesn’t impose an inheritance tax, it’s very rare for Arizonans to need to pay any inheritance taxes.

Federal Inheritance Tax Exemption

Keep in mind that the federal inheritance tax exemption changes every year. In 2023, the threshold is $12.92 million. This means that on the federal level, if your estate is valued at less than $12.92 when you die, then your beneficiaries will not have to pay any federal tax on their inheritance. If your estate is valued above $12.92 million, you’ll only be taxed on the amount that exceeds this number. It is important to consult an estate planning attorney to discuss estate taxes and find the best solution for your unique needs.

Arizona Estate Tax

As of 2006, Arizona no longer levies an estate tax. But several states do impose a state-level estate tax, including Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. If you own property in those states, or have heirs who live in one of those states, your estate and their inheritance may be subject to taxation.

Retirement Accounts

Although Arizona doesn’t impose inheritance or estate taxes, they aren’t the only taxes you need to worry about when settling an estate. Individual Retirement Accounts (IRAs) and other retirement accounts can create different tax issues. If you have a named beneficiary on these accounts, they can be subject to taxation.

Phelps LaClair now offers a groundbreaking new solution: the IRA Inheritance Trust. It is a revocable trust that you name as the primary or secondary beneficiary of your retirement accounts. You still maintain control of it, and when you pass away, the trust can stretch out the minimum taxable distributions to your heirs. This preserves the value of the retirement account over a longer period of time.

Income from Investments

If your estate includes income-producing investments like rental properties or stocks, your heirs may need to pay a tax on the income earned by those investments during the administration of the estate. The same may be true for property that has increased in value from the time of your death until the settlement of the estate. Tax-sheltered annuities are also subject to income tax on the income earned while you held the annuity. These annuities are tax-deferred, not tax-free.

Estate Planning Attorneys in Phoenix

We hope this overview has been helpful in giving you a simple picture of issues concerning tax on inheritance in Arizona. As a premier estate planning law firm in Phoenix, Chandler, and Mesa, the Phelps LaClair team can help you understand Arizona inheritance. We custom design personalized estate plans to protect your assets and minimize tax exposure for you and your heirs.

To find the best solution for your situation, come in for your free first consultation. Our attorneys are expertly informed on current tax law. We would be happy to help you with all of your estate planning needs.

Images used under creative commons license (Commerical Use) 09/13/2019  Photo by Sarah Pflug from Burst