Does Indiana Collect an Estate Tax?
Indiana Estate Tax Used to Mean a Pick Up Tax or Separate Estate Tax
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 Indiana 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 Indiana estate taxes? Prior to January 1, 2005, Indiana 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 Indiana resident owed federal estate taxes, then the Indiana Department of Revenue collected the pick up tax from the deceased Indiana resident's estate which was equal to the difference between the state estate tax credit allowed at the federal level and the amount paid in Indiana inheritance tax.
What is the Future of the Indiana 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" for short). 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.
The majority of states did absolutely nothing and therefore no longer collect a state estate tax, and Indiana was one of them. In addition, while under the provisions of EGTRRA the pick up tax was supposed to return in 2011, the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 ("TRUIRJCA" for short) did not include reinstatement of the pick up tax. Nonetheless, the provisions of TRUIRJCA were set to expire on December 31, 2012, which would have brought the pick up tax back in 2013, but 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, which means that the pick up 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.
Does Indiana Collect a State Inheritance Tax?
An inheritance tax is a tax imposed on the individual beneficiaries of an estate, while an estate tax is imposed on the entire value of an estate. So does Indiana currently collect a state inheritance tax, as opposed to a state estate tax?
The answer to this question is No, not as of January 1, 2013. Before that date, Indiana was one of seven states that collected a state inheritance tax.