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Does Arizona Have an Estate Tax?
Arizona is one of many states that does not impose a state estate tax. It has no state gift tax or inheritance tax, either. This means that when a resident passes away, the money they give their heirs is not taxed by the state of Arizona.
While this simplifies estate planning for many Arizona residents, estates over a certain amount will still owe federal taxes.
Federal Estate Tax Calculator
*Disclaimer: This information is not intended as legal tax advice, and we do not represent you as your legal counsel.
Federal Estate Tax and Your Arizona Estate
Even though Arizona has no state estate tax, federal taxes will apply to Arizona estates over a certain value. If you’re a high-net-worth individual, it’s important to work with an estate planning attorney in order to understand federal tax rules and how they might affect your heirs.
Federal Estate Tax Exemptions and Rates
For 2024, the federal estate tax exemption is set at $13.61 million per individual. This means that if the total value of your estate is below this threshold, it will not be subject to federal taxes.
However, if your estate exceeds the exemption, your estate's representative will need to file a federal estate tax return. Taxes will be calculated only on the amount exceeding the exemption and are based on the IRS Unified Rate Schedule.
For example, suppose that an estate is worth $13.63 million. Due to the current exemption, $13.61 million is not taxed. The next $10,000 over this amount is taxed at 18% to equal $1,800. The second $10,000 is taxed at 20%, or $2,000. The total federal estate taxes on this estate are $3,800.
Estate Planning Strategies to Reduce Taxes
Managing tax liability is a key goal in estate planning. Here are some common strategies to discuss with your estate planning attorney
Trusts and Estate Tax Planning
Trusts are powerful tools for wealth management. By strategically placing assets into a trust, you can control how those assets are managed and distributed, both during your lifetime and after your passing.
Certain types of trusts, such as irrevocable trusts, can remove assets from your taxable estate, effectively reducing your overall tax burden. Additionally, trusts can provide for beneficiaries with special needs or bypass probate, simplifying the estate settlement process.
Speak to an attorney at HagEstad Law Group, PLLC, to learn whether a trust is right for your needs.
Gifting Strategies
The IRS allows you to give a certain amount to individuals each year without reporting the gift on your tax return. For 2024, this annual exclusion is set at $18,000 per recipient. While larger gifts should be reported, they are not taxed until the total of all of these gifts reaches the IRS threshold, which is the same as for estate taxes: $13.61 million in 2024.
Gifts and estates are counted together for federal tax purposes. To see how that plays out, consider this example: Suppose that a father reported giving his children $4 million in gifts over his lifetime. When the father dies in 2024, his children receive his estate, which is worth $10 million.
Combined, the gifts and estate total $14 million. The amount over $13.61 million, or $390,000, would be subject to federal taxes.
Along with taking advantage of the gift tax exclusion, strategic gifting while you're living can be an effective way to reduce the size of your taxable estate. For example, certain payments for medical and educational purposes are exempt from gift taxes. Consider strategies such as paying tuition fees directly to educational institutions instead of giving the money directly to the student.
Charitable Giving
Donating to qualified charities during your lifetime or through your estate plan can provide both tax benefits and the satisfaction of supporting causes you care about. You can simply make a monetary donation to a charity to take advantage of this strategy. Alternatively, you might establish a charitable trust or designate certain charitable beneficiaries in your will.
Charitable gifts can reduce the size of your taxable estate while making a positive impact on the organizations you choose to support. An estate planning attorney can help you explore different charitable giving options and integrate them into your overall estate plan.
