Does Michigan Collect an Estate Tax?

Michigan Estate Tax Used to Mean a Pick Up Tax

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Michigan isn't known to be one of the most tax-friendly states for retirees, but it is one of a majority of states that doesn't collect an estate tax at the state level as of 2019.

Things were different before major changes took effect with regard to federal estate tax laws. Michigan actively collected a separate state-level estate tax called a "pick-up tax" or "sponge tax" prior to Jan. 1, 2005. It was equal to a portion of the decedent's federal estate tax bill.

What Is an Estate Tax?

An estate tax is levied upon the value of a decedent's estate over and above a certain threshold amount known as an exemption. It's based on value after various allowable deductions have been claimed.

Very few estates are liable for the federal estate tax as of 2019 because the exemption is so significant: $11.4 million. Some states that impose an estate tax have much lower exemptions, however.

An estate tax is paid by the estate, not by beneficiaries as the inheritance tax is. But it can affect the amounts of individual bequests all the same because this tax must be paid before any bequests from the estate can be made. Beneficiaries get what remains.

What Is a Pick-Up Tax?

The "pick-up tax" or "sponge tax" was a state tax based on the state estate tax credit the IRS used to allow on the federal estate tax return prior to January, 2005.

Each state had different tax laws with regard to the pick-up tax, so the amount that was collected varied based on each state's rules. In essence, the overall estate tax bill was not increased or decreased due to the pick-up tax. Rather, the total tax bill was apportioned between the IRS and the state taxing authority.

A portion of the federal estate tax was actually taken away from the IRS and paid instead to the decedent's state taxing authority. In simplest terms, an estate might pay $100,000 to the IRS, and the IRS would effectively share this with the state, remitting $25,000 of that and keeping the $75,000 balance.

The pick-up tax was officially phased out under the provisions of the Economic Growth and Tax Relief Reconciliation Act (EGTRRA), and the Tax Cuts and Jobs Act of 2018 (TCJA) makes it unlikely to come back anytime soon. The TCJA doubled the federal estate tax exemption from what it was in 2017, making very few estates liable for paying the federal tax to begin with.

What Is the Future of the Michigan Estate Tax?

Some states that used to collect a pick-up tax chose to enact laws that allowed the state to still collect a state estate tax after federal law changed. This has been referred to as "decoupling" because the states that enacted a state estate tax no longer based their laws on federal estate tax laws.

The majority of states did absolutely nothing, however, and Michigan was one of them. They stopped collecting a state estate tax.

The pick-up tax was supposed to return in 2011 under the provisions of EGTRRA, but the Tax Relief Act of 2010 did not include reinstatement so Michigan didn't resume levying its separate state estate tax.

Does Michigan Collect a State Inheritance Tax?

Michigan does not collect a state inheritance tax, either, as of 2019—at least not for deaths occurring after 1993.

The state used to have an inheritance tax, and it still does, but only for bequests from individuals who died on or before Sept. 30, 1993.

This retroactive inheritance tax would only apply to "after discovered assets." The property was not known to have existed at the time of the decedent's death and only came to light decades later.

This tax is assessed against individual shares of an received by each beneficiary, and beneficiaries are typically responsible for paying it.

You could still end up owing an inheritance tax because this tax depends on where the decedent lived or owned property, not where the beneficiary resides. Six states impose an inheritance tax as of 2019: Iowa, Kentucky, Nebraska, New Jersey, Pennsylvania, and Maryland. You would owe the tax to one of these states if the decedent died there or your bequest was physically located there, such as real estate.

The information contained in this article is not tax or legal advice and it is not a substitute for such advice. State and federal laws change frequently, and the information in this article might 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.