Do You Report Income Tax on an Inheritance in Arizona?

When you inherit property from a deceased person's estate, such as bank accounts or real estate, some states require you to pay an inheritance tax on the fair market value of the assets you receive. In Arizona, inheriting assets from an estate doesn't usually involve taxes, but there are a few exceptions to this rule.

At the time of publication, the federal government doesn't impose inheritance tax, and the Internal Revenue Service doesn't require you to claim inherited property on your income taxes. Arizona doesn't impose an inheritance tax on property you receive from a deceased person's estate, either. However, if you receive property in Arizona that was originally located in another state, you may owe inheritance tax to the state of origin.

Until 2005, Arizona imposed an estate tax by collecting the maximum allowable federal death tax credit. However, the Economic Growth and Tax Relief Reconciliation Act of 2001 repealed the death tax credit for individuals who died after 2004. As a result, Arizona repealed its estate tax, and Arizona no longer requires the estates of deceased individuals to file death tax returns.

Though you won't owe inheritance tax to the federal government or Arizona for most property you inherit, you must claim a portion of what you receive as income in a few situations. If you receive distributions from a trust that failed to pay income taxes, you will become responsible for the unpaid taxes. You may also owe income taxes if you inherit distributions from a tax-deferred retirement account.

Though there are no estate or inheritance taxes in Arizona, estates that are very large may owe an estate tax to the federal government. Estates that earn an income between the time the deceased person died and the completion of probate may owe income taxes to Arizona or to the federal government. However, the estate will typically pay these taxes prior to distributing assets to you and the other heirs.