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Does Alabama Collect an Estate Tax?

Alabama Estate Tax Used to Mean a Pick Up Tax or Sponge Tax

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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.

Does the state of Alabama currently collect an estate tax? The answer to this question is No, currently Alabama 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 Alabama state estate taxes? Prior to January 1, 2005, Alabama 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 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 Alabama resident owed federal estate taxes, then the Alabama Department of Revenue collected the pick up tax from the deceased Alabama resident's estate.

What is the Future of the Alabama 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 Alabama is one of them. In addition, under the provisions of EGTRRA the pick up tax was supposed to return in 2011, but nonetheless the Tax Relief Act of 2010 did not include reinstatement of the pick up tax, nor did the American Taxpayer Relief Act of 2012. So, at least at this point, Alabama's estate tax will not return unless state legislative action is taken.

For more information about the Alabama estate tax, refer to the Alabama Department of Revenue website and Legal Opinion -- Alabama Estate Tax Returns.

Does Alabama Collect a State Inheritance Tax?

Does Alabama 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, Alabama does not currently collect a state inheritance tax.

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