Understanding North Carolina Estate Taxes

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Currently, North Carolina 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 North Carolina estate taxes? Prior to January 1, 2005, North Carolina 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.

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 pickup 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 pickup 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 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 Kansas resident owed federal estate taxes, then the North Carolina Department of Revenue collected the pick up tax from the deceased North Carolina resident's estate.

The Future of the North Carolina 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 pickup tax, some states that used to collect a pickup tax chose to enact laws that allow the state to collect a state estate tax still.

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. North Carolina was among the minority that did enact a separate state estate tax which disappeared for one year in 2010 due to the repeal of the federal estate tax and then reappeared in 2011 with a $5 million exemption and a $5.12 million exemption in 2012.  In the end, the North Carolina estate tax was repealed for good effective January 1, 2013.  

In addition, while under the provisions of EGTRRA the pick up tax was supposed to return in 2011, it didn't due to the enactment of the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 ("TRUIRJCA"), which reinstated federal estate taxes but did not bring back the pick up tax. Nonetheless, the provisions of TRUIRJCA were set to expire on December 31, 2012, which would have brought the pickup 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 pickup tax was not resurrected in 2013 and will not come back in future years without further action by Congress.

Thus, don't expect North Carolina to begin collecting a state estate tax again anytime soon.

For more information about the North Carolina estate tax, refer to the North Carolina Department of Revenue website.

North Carolina and State Inheritance Tax

North Carolina does not collect a state inheritance 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.