Does Michigan Collect an Estate Tax?

Michigan Estate Tax Used to Mean a Pick Up Tax

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While Michigan is not known to be one of the most tax-friendly states for retirees, Michigan is one of a majority of states that currently does not collect an estate tax at the state level. Things were different before major changes took effect with regard to federal estate tax laws. But what do federal estate tax laws have to do with state estate taxes in Michigan? Prior to January 1, 2005, Michigan actively collected a separate state-level estate tax called a "pick up tax" or "sponge tax" equal to a portion of the overall federal estate tax bill.

What Is the Pick Up Tax or Sponge Tax?

The "pick up tax" or "sponge tax" was a state-based estate tax collected based on the state estate tax credit 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 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 Michigan resident owed federal estate taxes, then the Michigan Department of Treasury collected the pick up tax from the deceased Michigan resident's estate.

What Is the Future of the Michigan 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"). 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, thus no longer collect a state estate tax, and Michigan was one of them. Also, under the provisions of EGTRRA the pick up tax was supposed to return in 2011, but the Tax Relief Act of 2010 did not include reinstatement of the pick up tax, so don't count on Michigan levying its separate state estate tax anytime soon.

The Michigan Department of Treasury website is an excellent resource for any state-based tax question.

Does Michigan Collect a State Inheritance Tax?

Does Michigan currently collect a state inheritance tax, which is a tax assessed against the share received by each individual beneficiary of an estate? The answer to this question is no, Michigan does not currently collect 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.