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What is the Pick Up Tax?

State Estate Taxes That Equal a Portion of the Federal Estate Tax

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NOTE: State and federal 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.

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 pick up tax was a "revenue sharing" arrangement between the IRS and the state taxing authority. Thus, 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.

Phase Out of the Pick Up Tax Beginning in 2002

And what is the significance of January 1, 2005? Prior to this date, federal law allowed states with pick up tax laws on their books to collect the tax. But under the provisions of the Economic Growth and Tax Relief Reconciliation Act of 2001, the pick up tax was phased out such that in 2002 the tax equaled 75% of the former tax, 50% in 2003, and 25% in 2004, ending in complete repeal of the tax on January 1, 2005.

In response to the repeal of the pick up tax, 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, 2013, the following states still collect a state estate tax: Connecticut, Delaware, District of Columbia, Hawaii, Illinois, Maine, Maryland, Massachusetts, Minnesota, New Jersey, New York, Oregon, Rhode Island, Tennessee, Vermont, and Washington. And prior to January 1, 2005, most other states did collect a state estate tax in the form of the pick up tax or a separate estate tax.

For the current state estate tax exemptions for the states listed above, refer to the State Estate Tax and Exemption Chart.

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