What is the 'Pick-Up Tax'

The pickup tax was created to allow states to share in federal estate tax proceeds without a separate filing process. The pickup tax was phased out with the passage of the Economic Growth Tax Relief Reconciliation Act  (EGTRRA) of 2001. Some states replaced it with their own new estate taxes.

Breaking Down 'Pick-Up Tax'

Federal estate taxes have been around since 1916 and are only due on estates of a certain size. The limit in 2017 was $5.49 million, meaning an estate valued at less than this amount is not required to pay any estate tax. Prior to the beginning of its phase out in 2001 with the passage of new tax laws, the pickup tax was a convenient way for states to simply share in federal estate taxes without needing to create their own guidelines and jump through legislative hoops.

The pickup tax did not assess an additional liability for an estate to pay, but rather represented a sharing arrangement between states and the federal government for the estate taxes collected at the federal level. The costs of collecting estate taxes is disproportionately high given there are not that many people with estates meeting the minimum threshold. There is a good deal of auditing and paperwork involved with settling estates, so the pickup tax left that burden with the federal government while allowing states to share in the proceeds.

When faced with the repeal of the pickup tax in 2001, several states enacted new laws allowing them to continue collecting estate taxes. As of 2018 there are fourteen states, plus the District of Columbia, that collect estate taxes, which range from a low of just under 1 percent to 16 percent. Some states collect inheritance taxes, which differ from estate taxes in that the individuals receiving the proceeds of an estate, and not the estate itself, are responsible for paying the state taxes when they file.

Will the Estate Tax Die?

With the December 2017 passage of the Tax Cuts and Jobs Act, more changes are coming to the estate tax. Effective January 2018, the estate tax threshold is doubling to $11,180,000 for an individual filer, or $22,360,000 for married couples filing joint returns. Given the adverse impact on the size of the US debt, which reached $21 trillion in 2018, these new estate tax exemptions are up for reconsideration or reversion to the previous levels in 2026.

These new higher thresholds mean there will be less estate taxation money collected, and fewer people needing to file. If the federal government eventually phases out the federal estate tax completely, this will leave those states still collecting the tax with some difficult decisions. The administrative costs for auditing and collecting estate taxes on the state level from fewer people may not be worth the potential revenues. States have relied upon the federal government for the bulk of the estate tax administrative costs, as seen with the concept of the pickup tax. As it stands now, estate taxes provide less than 1 percent of all state revenues so many states may decide to eliminate their estate taxes as well.

There is evidence the estate tax works as a disincentive among small business owners who might otherwise invest in machinery and people. Given the trends with the estate tax since 2001, it does not seem out of the question that the estate tax itself wii die off in the not so distant future.

  1. Terminal Year

    Terminal year is the year in which an individual dies, in the ...
  2. Gross Estate

    Gross estate is the gross value of a person's estate at the time ...
  3. Taxable Estate

    Taxable estate is the portion of a deceased person's net assets ...
  4. Real Estate

    Real estate is property made up of land as well as anything on ...
  5. Effective Tax Rate

    The effective tax rate is the average rate at which an individual ...
  6. Gifting Phase

    The gifting phase is an investment stage at which individuals ...
Related Articles
  1. Taxes

    8 States With Estate Taxes

    Understand the difference between the federal estate tax and state-specific estate taxes. Learn about some of the worst states with estate taxes.
  2. Taxes

    How Much Will You Owe on Your Inheritance?

    Estate planning can be unpleasant, but in order to get the full benefit of what you've inherited, it’s important to be prepared for the related taxes.
  3. Retirement

    Estate Planning Law Changes You Need To Know

    When organizing your affairs, you'll need to be aware of tax rates and other regulations.
  4. Financial Advisor

    States With the Highest Inheritance/Estate Taxes

    State and federal estate taxes may be levied upon death, but there's a difference between inheritance taxes and estate taxes. Here's what you need to know.
  5. Retirement

    Estate Planning and Elderly and Passed Clients

    By keeping up with new estate tax rules, financial advisors can help elderly clients save big on tax costs.
  6. Personal Finance

    A Trump Estate Tax Repeal? Not So Fast

    Donald Trump faces an uphill battle when it comes to his promise of repealing the estate tax. Here's why.
  7. Retirement

    Why Estate Planning Isn't Just for the Rich

    Estate planning isn't just for the wealthy. These estate transfer strategies can help you leave more to your heirs.
  8. Taxes

    Income Tax Planning Is the New Estate Tax Planning

    Use these strategies to minimize your family’s income taxes through your estate plan.
  9. Investing

    10 Habits of Successful Real Estate Investors

    Make a plan, develop a niche and the other key behaviors it takes to grow a successful, long-term career in real estate.
  10. Investing

    Real Estate Vs. Stocks: Which One's Right For You?

    There are ups and downs for both real estate and stock investments, so before diving in, know the differences between the two.
Trading Center