Introduction
Luckily for Arizona residents, there is no state estate tax. This became effective January 1, 2005. Prior to this date, Arizona and all the other states collected what is called a “pick up tax” from the estates of deceased residents if they owed federal estate taxes as well.
This all changed with the Economic Growth and Tax Relief Reconciliation Act (EGTRRA) which phased out the pick up tax. While some states sought for a replacement, Arizona did not. The Arizona legislature went so far as to completely repeal the estate tax provisions located in the Arizona statues.
Federal Estate Tax
Even though Arizona does not have its own estate tax, the federal government still imposes its own tax. All estates in the United States that are worth more than $5.49 million as of 2017 are required to pay an estate tax. This exemption rate is subject to change due to inflation. The current federal estate tax is currently around 40%. For most people, this is not something to be worried about. 99.5% of estates will not owe any federal gift or estate tax. If you are still worried about having to pay an estate tax, there are other exemption and deduction amounts that should further quell any fears you have about paying a federal estate tax.
- Marital Deduction: All property left to a surviving spouse is free of federal estate taxes. In addition, the exemption amount for a married couple is twice as much as the federal amount, almost $11 million. The surviving spouse gets a huge tax break. If their spouse died without using up their entire tax exemption, then the surviving spouse is allowed to use up what is left in addition to their personal exemption.
- Charitable Deduction: If you leave property to a charity, then that part of your estate will be tax free. That portion of your estate will not be counted towards your estate tax exemption.
- Life Insurance Trust: When you create a life insurance trust, the proceeds of your life insurance are taken out of your estate.
- Gifts: If you really want to avoid estate taxes, you can give away your property in gifts. Gifts less than $14,000 per year are tax-free and do not count against your exemption amount. This can add up quickly if you keep at it for a sufficient period of time. Also, any money spent for someone’s medical bills or school tuition is tax-exempt.
States with Estate Taxes
While most of the states in the United States do not impose their own estate tax, there are a few who do. Although recently, many states have been repealing their estate tax. Policies have been rapidly changing. Despite these changes, the following states still impose an estate tax:
- Connecticut
- Delaware
- District of Columbia
- Hawaii
- Illinois
- Maine
- Maryland
- Massachusetts
- Minnesota
- New Jersey (repealed for deaths as of January 1, 2018)
- New York
- Oregon
- Rhode Island
- Tennessee
State estate taxes are generally much lower than federal estate taxes and most states will exempt estates up to the federal exemption. This being said, some states have a much lower exemption. Oregon for example has an exemption of $1 million. There are many websites online that will tell you exactly what your state’s estate tax policies are.
If estate taxes are something that you are worrying about, seek professional advice on how to best avoid estate taxes or at least reduce them. Our legal team at JacksonWhite is willing to answer your questions and help you in your estate planning.
Call our Arizona Estate Planning team at (480)467-4325 to discuss your case today.
