Friday, January 29, 2010

Does Arizona Impose a State Estate Tax?

The quick answer to this question is no, the State of Arizona does not impose a state estate tax.

Before the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), every state in the United States imposed a state estate tax that, at a minimum, collected the amount of tax allowed as a credit for state death taxes by the federal government. EGTRRA radically changed the state estate tax regimes by eliminating the credit for estates of decedents dying after January 1, 2005.

The federal credit for state death taxes was a revenue-sharing arrangement between the federal government and the states. Because the amount of the credit was paid in tax (it was paid to the state to the extent the state imposed a state death tax equal to or in excess of the credit, or it was paid to the federal government as a part of the federal tax to the extent it was not paid to the state), the states enacted what is called a “pick-up” or “sponge” tax to pick up the portion of the estate tax that could be imposed on the state’s resident decedents without increasing the estate tax burden. The overall estate tax bill was neither increased nor decreased due to the pick-up tax; the tax bill was apportioned between the Internal Revenue Service and the state taxing authority. This was a popular approach as it required only a few sentences in the statute books, permitted the state revenue officials to rely on the federal audits of returns, and meant that the state death taxes were being taken out of monies that would have otherwise gone to the federal government.

In response to the changes in federal law (EGTRRA) that repealed the federal state death tax credit, some states have enacted laws that allow the state to continue to collect a state estate tax. Arizona, however, no longer imposes a state estate tax for decedents dying after January 1, 2005.

From Publication 900 - “Since the federal state death tax credit was the basis of the Arizona estate tax, Arizona effectively no longer had an estate tax after the federal repeal. Following the federal repeal, the Arizona legislature repealed the Arizona estate tax provisions (Laws 2006, Ch. 262, Section 3). Additionally, Arizona does not impose an inheritance or gift tax.”

Publication 900

Senate Bill 1170


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