NOTE: State laws change frequently and the following information may not reflect recent changes in the laws. For current tax or legal advice, please consult with an accountant or an attorney since the information contained in this article is not tax or legal advice and is not a substitute for tax or legal advice.
The answer to this question is No, currently 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? Prior to January 1, 2005, Arizona actually 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.
What is 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, prior to 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.
What is 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 still collect a state estate tax. 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. In addition, 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 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 the Arizona pick up tax laws.
For more information about the Arizona estate tax, refer to Arizona Department of Revenue Publication 900.