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Does North Dakota Collect an Estate Tax?

North Dakota 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 North Dakota is not known to be one of the most tax-friendly states for retirees, North Dakota 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 North Dakota state estate taxes? Prior to January 1, 2005, North Dakota 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 death 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 North Dakota resident owed federal estate taxes, then the North Dakota Office of State Tax Commissioner collected the pick up tax from the deceased North Dakota resident's estate.

What is the Future of the North Dakota 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 North Dakota was 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, so don't count on North Dakota levying its own separate state estate tax any time soon.

North Dakota Filing Requirements

Note that even though North Dakota does not collect a state estate tax at this time, if an estate is required to file a federal estate tax return (IRS Form 706), then the estate is still required to file a North Dakota Estate Tax Return, Form 54-91, along with copies of Form 706, the decedent's Last Will and Testament (if any), and an original death certificate.

If an estate is not required to file a federal estate tax return, then there is no estate tax filing requirement for North Dakota purposes. However, the Register of Deeds Office will require a copy of the death certificate and a copy of the property description if the deceased person owned real estate jointly with other person(s).

For more information about the North Dakota estate tax, refer to Frequently Asked Questions -Estate of the North Dakota Office of State Tax Commissioner website.

Does North Dakota Collect a State Inheritance Tax?

Does North Dakota 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, North Dakota does not currently collect a state inheritance tax.

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