Does Indiana Collect an Estate Tax?

Indiana Estate Tax Used to Mean a Pick Up Tax or Separate Estate Tax

Exterior view of University of Indiana in the fall.

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Indiana does not collect an estate tax at the state level. However, that has not always been the case. Things were different before major changes took effect with regard to federal estate tax laws.

Before January 1, 2005, Indiana—and several other states did collect a separate estate tax at the state level. These state-level taxes were called a pickup tax and were on top of federally assessed taxes. The pickup tax was equal to a portion of the overall federal estate tax bill.

What Is the Pickup Tax?

The pickup tax is a state estate tax that is collected based on the state estate tax credit. This credit is one that the Internal Revenue Service (IRS) allowed on the federal estate tax return, IRS Form 706, before January 1, 2005.

Each state had different tax laws with regard to the pickup 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 pickup tax. Instead, the total tax bill was apportioned between the IRS and state taxing authority.

Previously, a portion of the federal estate tax paid was moved from the IRS, and instead, paid to the decedent's state taxing authority. The state's portion was equal to the difference between the state estate tax credit—allowed at the federal level—and the amount paid in Indiana inheritance tax. So, before January 1, 2005, if a deceased Indiana resident owed federal estate taxes, then the Indiana Department of Revenue collected the pickup tax from the deceased Indiana resident's estate.

Changes to the Indiana Estate Tax

Effective January 1, 2005, the pickup 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 state's pickup tax—some states 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.

The majority of states did absolutely nothing and, therefore, no longer collect a state estate tax. Indiana was one of them.

Under the provisions of EGTRRA, the pickup tax was supposed to return in 2011. However, the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (TRUIRJCA) did not include reinstatement of the pickup tax. Nonetheless, the provisions of TRUIRJCA were set to expire on December 31, 2012, which would have brought the pickup tax back in 2013. Instead, Congress and President Obama acted in early 2013 to pass the American Taxpayer Relief Act (ATRA).

Under the provisions of ATRA, the rules governing federal estate taxes as set forth under TRUIRJCA were made permanent. This permanence means that the pickup tax was not resurrected in 2013 and will not come back in future years without further action by Congress.

Thus, Indiana's estate tax will remain dormant unless the Indiana legislature enacts a free-standing state estate tax, but this seems unlikely in the near future since Indiana repealed its state inheritance tax effective January 1, 2013 - see more on that below.

Beneficiary Inheritance Tax

While an estate tax is imposed on the entire value of an estate, an inheritance tax is imposed on the individual beneficiaries of the estate proceeds.

As of January 1, 2013. Indiana does not collect a state-imposed inheritance tax. Before that date, Indiana was one of seven states that collected a state inheritance tax.

The information contained in this article is not tax or legal advice and is not a substitute for such advice. State and federal laws change frequently, and the information in this article may not reflect your own state’s laws or the most recent changes to the law. For current tax or legal advice, please consult with an accountant or an attorney.