Legal Definitions - pickup tax

A pickup tax was a specific type of state estate tax that was designed to "pick up" or capture the maximum amount of credit allowed against the federal estate tax for state death taxes paid. Before 2005, federal law permitted estates to reduce their federal estate tax liability by a certain amount for any estate taxes paid to a state. A state's pickup tax was specifically structured to equal this federal credit amount.

The primary purpose of a pickup tax was to shift a portion of the estate tax revenue from the federal government to the state, without increasing the overall tax burden on the deceased person's estate. The estate would pay the pickup tax to the state, and then claim an equivalent credit against its federal estate tax, resulting in no net increase in the total tax paid by the estate. However, the federal credit for state death taxes was phased out and ultimately repealed for deaths occurring after December 31, 2004. Consequently, the original form of the pickup tax is no longer applicable. While some states subsequently repealed their estate taxes or reformed them into independent state estate taxes, the term refers specifically to this historical mechanism tied to the federal credit.

• Example 1 (Historical Application):

  Imagine an individual, Mr. Henderson, who passed away in 2003, leaving a taxable estate. The state where Mr. Henderson resided had a pickup tax in effect at that time. When Mr. Henderson's estate filed its federal estate tax return, it calculated a certain amount of federal estate tax. However, federal law allowed a credit for state death taxes paid. The state's pickup tax was precisely calculated to match this maximum allowable federal credit. If the federal credit was $75,000, the state's pickup tax would also be $75,000. The estate would pay $75,000 to the state and then reduce its federal estate tax liability by the same $75,000. This meant the total tax burden on Mr. Henderson's estate remained the same, but the state received $75,000 that would have otherwise gone to the federal government.

• Example 2 (Post-Repeal Impact):

  Consider Ms. Chen, who passed away in 2015, leaving a taxable estate in a state that historically had a pickup tax. Because the federal credit for state death taxes was repealed for deaths occurring after December 31, 2004, the mechanism for a pickup tax ceased to exist. Even if the state's statutes still contained old language referencing a "pickup tax," it would have no practical effect. There would be no federal credit for the state to "pick up." In this scenario, the state would either have repealed its estate tax entirely, or it would have reformed its estate tax into an independent system with its own rules and rates, no longer tied to a federal credit.

• Example 3 (Distinction from an Independent State Estate Tax):

  Suppose Mr. Davies passes away today, residing in a state that has its own independent estate tax. This state's estate tax has specific exemption amounts (e.g., the first $5 million of an estate is exempt) and its own progressive tax rates, entirely separate from federal estate tax calculations. This is not a pickup tax. While Mr. Davies's estate might owe both federal estate tax and this state's independent estate tax, the state tax is an additional levy determined solely by the state's own statutes. It does not depend on, nor is it limited by, a federal credit for state death taxes (as that credit no longer exists). This illustrates that not all state estate taxes were, or are, pickup taxes; many states have chosen to implement their own distinct estate tax systems.