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Does New Mexico Collect an Estate Tax?

New Mexico 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.

While New Mexico is not known to be one of the most tax-friendly states for retirees, New Mexico is one of the majority of states that currently 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 New Mexico state estate taxes? Prior to January 1, 2005, New Mexico 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 credit for state death taxes 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 New Mexico resident owed federal estate taxes, then the New Mexico Taxation and Revenue Department collected the pick up tax from the deceased New Mexico resident's estate.

What is the Future of the New Mexico 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. 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 New Mexico to begin collecting a state estate tax any time soon.

Please note that the New Mexico Taxation and Revenue Department website currently gives confusing information about the New Mexico estate tax. According to the website, “Residents and nonresidents of New Mexico are subject to the Estate Tax Act, Section 7-7-1 et seq. NMSA 1978. If there is a federal requirement to file a federal estate tax return, the estate’s personal representative must file a return with the Taxation and Revenue Department (TRD). The state filing must be completed on or before the deadline for the federal estate tax return, a copy of which must accompany the state filing.”

This information is misleading because, as mentioned above, the New Mexico estate tax was tied to the federal credit for state death taxes, and this credit was repealed under the provisions of EGTRRA effective for deaths occurring on or after January 1, 2005, and continues to be repealed under the provisions of ATRA.

Does New Mexico Collect a State Inheritance Tax?

Does New Mexico 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, New Mexico does not currently collect a state inheritance tax.

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