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.
The answer to this question is No, currently Texas 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 Texas estate taxes? Prior to January 1, 2005, Texas actually 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.
What is 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 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 Texas resident owed federal estate taxes, then the Texas Comptroller's Office collected the pick up tax from the deceased Texan's estate.
What is the Future of the Texas 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, which was and still in the case in Texas. 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 Act of 2010, which reinstated federal estate taxes but did not bring back the pick up tax. Nonetheless, the provisions of the Tax Relief Act of 2010 are set to expire on January 1, 2013 if Congress and President Obama fail to take action before the end of 2012. If this happens, then the federal estate tax laws will revert to the laws that were in effect in 2001, and so the pick up tax, and therefore Texas' estate tax, will return on January 1, 2013.
For more information about the Texas state tax, refer to the Texas Comptroller of Public Accounts website - Your Estate Under Texas Law.