What is the Pick-Up Tax?
The Pick-Up Tax Shared Revenue Between the IRS and States
Some states collected a separate state estate tax called a "pick-up tax" or a "sponge tax" before Jan. 1, 2005. These taxes were equal to a portion of an estate's overall federal estate tax bill, but they've since been phased out.
What Was the Pick-Up Tax?
The pick-up tax was based on the state estate tax credit the Internal Revenue Service allowed on an estate's federal tax return, IRS Form 706. It was effectively a revenue-sharing arrangement between the IRS and the state taxing authority.
The overall estate tax bill was not increased or decreased due to the pick-up tax. Instead, the tax bill was apportioned between the IRS and the state. It allowed states to collect some revenues without going through all the legislative difficulty of establishing an estate tax of their own.
So what does this mean in plain English? A portion of the federal estate tax paid by the estate was taken away from the IRS and given to the decedent's state taxing authority instead. The pick-up tax was collected only when an estate was large enough that its value exceeded that year's federal exemption, which was $1.5 million in 2004 before the pick-up tax was phased out.
Phase-Out of the Pick-Up Tax
Prior to Jan. 1, 2005, federal law allowed states with pick-up tax laws to collect the tax, but under the provisions of the Economic Growth and Tax Relief Reconciliation Act of 2001, the tax began gradually diminishing. When a provision in tax law is phased out, it doesn't end all at once. It tapers off over a prescribed period of time. The tax was 75 percent in 2002, dropped to 50 percent in 2003, then to 25 percent in 2004. This phasing out ended in a complete repeal of the tax on Jan. 1, 2005.
In response, some states that once collected this tax enacted laws allowing them to still collect a state estate tax. Other states did nothing. As a result, they no longer collect a state estate tax at all, and they're now in the majority.
Which States Still Collect State Estate Taxes?
As of 2016, 14 states and the District of Columbia still collected a state estate tax. They include:
- New York
- Rhode Island
- New Jersey
Tennessee repealed its estate tax effective the beginning of 2016.
Before Jan. 1, 2005, most other states collected a state estate tax in the form of the pick-up tax or a separate estate tax, so the phase-out made a significant difference.
NOTE: State and federal laws change frequently and the following information may not reflect recent changes. For current tax or legal advice, please consult with an accountant or an attorney. The information contained in this article is not tax or legal advice and it is not a substitute for tax or legal advice.