Does Arizona Collect an Estate Tax?

Cathedral Rock at Sunset, Sedona, Arizona, USA
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Arizona does not collect an estate tax at the state level. A few years ago, however, things were different before major changes took effect with regard to federal estate tax laws. What do federal estate tax laws have to do with Arizona state estate taxes? Before January 1, 2005, Arizona did collect a separate estate tax at the state level, called a "pick up tax," that was equal to a portion of the overall federal estate tax bill.

The Pick-up Tax

The pick-up tax is a state estate tax that is collected based on the state estate tax credit that the IRS allowed on the federal estate tax return, IRS Form 706, before January 1, 2005. Each state had different tax laws with regard to the pick-up tax, so the amount that a state would collect varied based on that state's own estate tax laws. In essence, however, the overall estate tax bill was not increased or decreased due to the pick-up tax. Instead, the total tax bill was apportioned between the IRS and state taxing authority.

So what does this mean in plain English? It means that a portion of the federal estate tax was actually taken away from the IRS and instead paid to the decedent's state taxing authority. As such, prior to January 1, 2005, if a deceased Arizona resident owed federal estate taxes, then the Arizona Department of Revenue collected the pick-up tax from the deceased Arizona resident's estate.

The Future of the Arizona Estate Tax

Effective January 1, 2005, the pick-up tax was officially phased out under the provisions of the Economic Growth and Tax Relief Reconciliation Act (EGTRRA). In response to these changes in federal law that phased out the pick-up tax, some states that used to collect a pick-up tax chose to enact laws that allow the state to collect a state estate tax still. This is referred to as "decoupling" since the states that enacted a state estate tax no longer based their state estate tax laws on current federal estate tax laws.

While a majority of states did absolutely nothing and therefore no longer collect a state estate tax, in 2006 the Arizona legislature took things one step further and permanently repealed the state estate tax provisions contained in the Arizona statutes. Also, under the provisions of EGTRRA, the pick-up tax was supposed to return in 2011, but the Tax Relief Act of 2010 did not include reinstatement of the pick-up tax. So, even if the federal law is changed to allow the pick-up tax to come back in the future, Arizona will not be able to collect a pick-up tax unless the Arizona legislature reinstates Arizona pick up tax laws.

The information contained in this article is not tax or legal advice and is not a substitute for such advice. State and federal laws change frequently, and the information in this article may not reflect your own state’s laws or the most recent changes to the law. For current tax or legal advice, please consult with an accountant or an attorney.