All You Need to Know About Virginia's Estate and Inheritance Taxes

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Virginia residents don't have to worry about paying estate or inheritance tax at the state level, but things weren't always so copacetic. Major changes took effect with regard to federal estate tax laws over the years that changed Virginia's landscape.

What Is the Pick-Up Tax or Sponge Tax?

Prior to Jan. 1, 2005, Virginia collected 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.

The pick-up tax or sponge 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 Jan. 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.

In other words, a portion of the federal estate tax was actually taken away from the IRS and instead paid to the decedent's state taxing authority. So, prior to Jan. 1, 2005, if a deceased Virginia resident owed federal estate taxes, the Virginia Department of Taxation collected the pick-up tax from the deceased Virginia resident's estate.

What Is the Future of the Virginia Estate Tax?

On Jan. 1, 2005, the pick-up tax was officially phased out under the provisions of the federal Economic Growth and Tax Relief Reconciliation Act (EGTRRA). In response to these changes in federal law, some states that used to collect a pick-up tax chose to enact laws that allow the state to collect a state estate tax. This was 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.

This regime was imposed for deaths that occurred between Jan. 1, 2005, and June 30, 2007; for deaths occurring on or after July 1, 2007, Virginia stopped collecting a state estate tax altogether. The majority of states did absolutely nothing after passage of the EGTRRA and therefore no longer collect a state estate tax, but Virginia was one of a handful of states that did enact a separate state estate tax.

While under the provisions of the 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 left the pick-up tax behind.

The provisions of TRUIRJCA were set to expire on Dec. 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. As a result, the pick-up tax was not resurrected in 2013 and will not come back in future years without further action by Congress. That spells very good news for Virginia residents who won't be subject to state estate for now.

However, according to at least one legal expert, a bill introduced in the Senate in 2018 proposes to reinstate the estate tax in Virginia. It remains an open question whether the bill will pass, but some previous bills with a similar makeup have demonstrated an interest among Virginia's legislators to bring it back sometime in the future.

Virginia's Inheritance Tax?

A state inheritance tax is 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. Virginia residents are not as of 2018 subject to a state inheritance tax.

You should be aware, however, that if you inherit from someone who lives in Iowa, Kentucky, Nebraska, New Jersey, or Pennsylvania, you may get a tax bill from that particular state because these five states do have an 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.