Prior to January 1, 2005, some states collected a separate state estate tax, called a "pick up tax" or "sponge tax," that was actually equal to a portion of the overall federal estate tax bill.
Definition of the Pick Up Tax
So what does the "pick up tax" or "sponge tax" mean? It means 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. In essence, 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 appropriate state taxing authority.
So what in plain English does this mean? 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.
And what is the significance of January 1, 2005? This is the date that the pick up tax was officially phased out under the provisions of the Economic Growth and Tax Relief Reconciliation Act of 2001. In response, some states that used to collect a pick up tax have enacted laws that allow the state to still collect a state estate tax, while other states have done nothing and as a result no longer collect a state estate tax at all.
Which States Still Collect a State Estate Tax?
As of January 1, 2011, a majority of states do not collect a state estate tax, while the following states do: Connecticut, Delaware, District of Columbia, Hawaii, Illinois, Maine, Maryland, Massachusetts, Minnesota, New Jersey, New York, North Carolina, Ohio, Oregon, Rhode Island, Tennessee, Vermont, and Washington. And prior to January 1, 2005, all other states did collect a pick up state estate tax.
For the current state estate tax exemptions for the states listed above, refer to the State Estate Tax and Exemption Chart.
