Is an Inheritance Taxable in Arizona?

Inheriting assets can introduce questions about tax responsibilities. While an inheritance may not be taxed directly, it can trigger other taxes. For example, the deceased’s estate may owe federal taxes, or the beneficiary could face taxes later when the asset is sold.

Arizona State-Level Inheritance and Estate Taxes

Arizona does not impose an inheritance tax. This means beneficiaries are not taxed by the state for receiving assets from a deceased person’s estate, regardless of the beneficiary’s relationship to the decedent or the value of the assets.

Arizona also does not levy a state estate tax. Since Arizona has neither an inheritance nor an estate tax, assets can pass to beneficiaries without any state-level death tax diminishing their value.

Federal Estate Tax Considerations

While Arizona does not have a state-level tax, the federal government imposes an estate tax. An estate tax is calculated on the total fair market value of a person’s assets at death and is paid by the deceased’s estate, not by the individual heirs.

The federal estate tax applies only to estates that exceed a high-value exemption amount. For 2025, the exemption is $13.99 million per individual. An individual can pass away with assets valued up to this amount without their estate owing any federal estate tax. For a married couple, this amount can be combined, allowing them to pass on nearly $28 million tax-free. This high exemption is temporary and is scheduled to be reduced by about half in 2026 under current law.

Due to the substantial exemption, most estates in the United States do not owe federal estate tax. Only the value of an estate that exceeds the exemption is subject to the tax, which has a maximum rate of 40%. For example, if an estate is valued at $15 million in 2025, only the $1.01 million above the exemption would be subject to the federal tax.

Income Tax Implications for Inherited Assets

Certain inherited assets can create an income tax liability for the beneficiary. This tax is separate from estate taxes and is triggered when the beneficiary takes distributions. The most common examples are tax-deferred retirement accounts, such as traditional IRAs and 401(k)s. Withdrawals from an inherited traditional IRA are taxed as ordinary income to the beneficiary.

The treatment differs for Roth IRAs, where contributions are made with after-tax dollars. If the original owner had the Roth IRA for at least five years, qualified distributions to a beneficiary are typically tax-free. Inheriting a Roth account is more advantageous from a tax perspective than inheriting a traditional, tax-deferred account.

Most non-spouse beneficiaries who inherit a retirement account must withdraw all funds from the account within 10 years of the original owner’s death. This rule, from the SECURE Act, can accelerate the income tax liability for beneficiaries of large traditional IRAs. Other assets, known as “Income in Respect of a Decedent” (IRD), such as unpaid salary, bonuses, or certain installment sale payments, are also taxed as income to the recipient.

Capital Gains Tax on Inherited Property

When you inherit property like real estate or stocks, no tax is due at the time of inheritance. A tax liability arises only if you later sell that asset for a profit. The amount of that profit, or capital gain, is determined by a tax rule known as the “step-up in basis.”

An asset’s basis is its original cost. However, when an asset is inherited, its basis is “stepped up” to its fair market value on the date of the original owner’s death. This adjustment effectively erases any appreciation in the asset’s value that occurred during the decedent’s lifetime for tax purposes.

For example, imagine someone bought a house for $100,000, and it was worth $500,000 on the day they died. The heir who inherits the house receives it with a new, stepped-up basis of $500,000. If the heir immediately sells the house for $500,000, there is no capital gain and therefore no capital gains tax to pay. If they sell it a year later for $520,000, they would only owe capital gains tax on the $20,000 of appreciation that occurred after they inherited it.