While there is no Arizona inheritance tax, there are other taxes you should know about. For example, if you are a non-resident alien (non-green card holder) there could be a big estate tax surprise for your family. Learn more about what is taxable when it comes to trusts, estates, and wills here.
Who has to pay Arizona’s inheritance tax?
Arizona does not impose an inheritance or estate tax.
When is federal estate tax due?
There is a federal estate tax, and it varies depending on if you are a U.S. Citizen or Nonresident Alien.
Federal estate tax for U.S. Citizens.
The federal estate exemption is $12.92 million as of 2023. The estate tax is up to 40% for amounts over that amount.
Federal estate taxes are typically due within nine months of the decedent’s death, although payment extensions can be requested. Beneficiaries and executors should contact a tax professional immediately to receive answers to their specific questions and to determine what taxes may need to be paid and when they will be due.
Transfer Taxes for Nonresident Aliens
The estate tax for non-resident aliens depends on where they were “domiciled.” Here’s what “domicile” means according to the U.S. Treasury:
A person acquires a domicile in a place by living there, for even a brief period of time, with no definite present intention of later removing therefrom. Residence without the requisite intention to remain indefinitely will not suffice to constitute domicile, nor will intention to change domicile effect such a change unless accompanied by actual removal.
Estate and gift transfer taxes vary based on whether you are a domiciliary or non-domiciliary of the U.S.
- Nonresident aliens who are U.S. domiciliaries face transfer taxes of up to 40 percent and receive the same exemption as U.S. citizens. That is $10 million indexed for inflation. The tax rate and exemption applies to all of the nonresident’s worldwide assets. As we sit, the current estate tax exemption is $12.92 million.
- Nonresident aliens who are non-U.S. domiciliaries also face transfer taxes up to 40 percent but receive only a $60,000 exemption for transfers upon passing. The tax rate and exemption applies to a limited type and amount of U.S. situs assets.
Additionally, tax treaties between the U.S. and more than 15 foreign countries can play a part in determining breaks in tax rates, domicile definitions, and additional deductions. A nonresident alien who is a domiciliary of one of the treaty nations may attain great benefits through these estate and gift tax treaties.
What is Income In Respect of the Decedent?
Income in respect of the Decedent (IRD) is income that was not reported on the decedent’s final income tax return and belongs to him or her. This includes investment earnings, canceled debt, and other items of consideration. It is important for beneficiaries to accurately report this type of income on their income tax returns.
Are there any estate planning strategies that can reduce taxes?
There are several estate planning strategies that can be used to reduce the amount of taxes your estate will have to pay. One popular tactic is gifting, which can effectively reduce an estate’s value and decrease the amount of tax burden on it. Another strategy is to use trusts, which offers reduced liabilities for heirs when the settlor passes away. There are also IRS-approved discounts on transfer taxes available for certain transfers.
Are there any exemptions or special considerations?
Yes, there are exemptions and special considerations when it comes to Arizona’s Inheritance Tax. For instance, transfers to a surviving spouse or to a charitable entity are exempt from Arizona Inheritance tax and other taxes. Likewise, if the total amount of bequests falls below certain thresholds then no tax will be owed. Additionally, any gifts made by the decedent within one year of their death will also be exempt from taxation, if they are below a certain amount. (That amount is $17,000 as of 2023.)
We also wrote a post about Death Taxes that might answer some of your questions. Otherwise, just give us a call.
Do You Have Questions About Inheritance Tax in Arizona, Or Other Estate Taxes?