People use the terms "estate tax" and "inheritance tax" as if they mean the same thing. They do not. They are taxed in different ways, paid by different people, and follow different rules. Knowing the gap between the two matters when you plan how your assets will pass to the next generation.
Estate Tax: Paid by the Estate
An estate tax is based on the total value of everything a person owns at death. The estate itself pays this tax, not the heirs. The federal government runs the federal estate tax through the IRS.
The federal estate tax exemption for 2026 is $15 million per person. Married couples can double this through portability. The federal estate tax only applies to the portion above the exemption. The rate on amounts above that ranges from 18 to 40 percent. Only a small share of estates in the United States owe this tax. For most families, it will never apply.
Inheritance Tax: Paid by the Person Who Inherits Assets
An inheritance tax works in a different way. Instead of taxing the estate as a whole, it taxes each person who inherits assets. The amount owed depends on the bond between the heir and the deceased. Spouses are almost always exempt. Children and close relatives usually pay a lower rate. Unrelated beneficiaries may pay a higher rate.
There is no federal inheritance tax. Six states impose one: Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. Rates range from 18 percent or less for close family to as high as 40 percent for unrelated heirs. The rules vary widely from state to state.
Arizona Doesn't Have Either One
Arizona does not have an inheritance tax or a state estate tax. Arizona ended its estate tax in 2006. It has never had an inheritance tax. For Arizona residents, the only possible tax at death comes from the federal estate tax. And that only applies to estates above the $15 million federal exemption.
If you own property in a state that does impose an estate or inheritance tax, that state may tax the property within its borders. This is true no matter where you live. Owning real estate in more than one state can make estate planning harder and trigger taxes you may not expect.
What About Income Tax on Inherited Assets?
While Arizona does not have estate or inheritance taxes at the state level, heirs may still owe income tax on certain inherited assets. The most common example is a retirement account like an IRA or 401(k). When an heir takes money from an inherited retirement account, that withdrawal is taxable income. Under the current 10-year payout rule, most non-spouse heirs must empty an inherited IRA within 10 years. That can create a real tax burden.
Most other inherited assets, like a home or stock account, get a stepped-up cost basis at death. The heir only pays income tax on gains that happen after the date of death. Not on the prior owner's gains.
Why This Still Matters for Planning
Even though most Arizona families will never owe estate or inheritance tax, planning ahead still matters. The One Big Beautiful Bill Act of 2025 made the higher federal exemption permanent. But Congress can always change tax law later. Families with larger estates should stay current on exemption levels and plan with care.
Good estate planning looks at the rules as they are today. It also builds in room for changes down the road. It addresses the taxes that do hit most families, like income tax on retirement accounts and capital gains on assets that grew in value. A solid plan protects your family from surprises. No surprises down the road.
For the full Arizona walkthrough of federal estate, gift, and GST tax planning, including portability, the lifetime exemption, and annual exclusion gifts, read our pillar guide: Estate, Gift & GST Tax in Arizona: The Complete Guide.