Does South Dakota Collect an Estate Tax?
South Dakota Estate Tax Used to Mean a Pick Up Tax or Sponge 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.
South Dakota is one of seven states that do not collect a state income tax, and, in addition, South Dakota is one of the majority states that do 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 South Dakota state estate taxes? Prior to January 1, 2005, South Dakota actually did collect a separate estate tax at the state level, called a "pick up tax" or "sponge tax," that was 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" is a state estate tax that is collected based on the state death 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 South Dakota resident owed federal estate taxes, then the South Dakota Department of Revenue collected the pick-up tax from the deceased South Dakota resident's estate.
What is the Future of the South Dakota 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 and therefore no longer collect a state estate tax, and South Dakota was one of them. 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 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, don't expect South Dakota to begin collecting a state estate tax anytime soon.
For more information about the South Dakota estate tax, refer to the South Dakota Department of Revenue website.
Does South Dakota Collect a State Inheritance Tax?
Does South Dakota currently collect a state inheritance tax, which is a tax assessed against the share received by each individual beneficiary of an estate as opposed to an estate tax, which is assessed against the entire estate? The answer to this question is No, South Dakota's inheritance tax was repealed for deaths occurring after June 30, 2001.