By Julie Garber. Wills & Estate Planning Expert
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.
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 Iowa estate taxes? Prior to January 1, 2005, Iowa did collect a separate estate tax at the state level, called a "pick up tax," that was equal to a portion of the overall federal estate tax bill.
What is the Pick Up Tax?
The "pick up tax" is 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.
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.
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Since as discussed below Iowa collects a state inheritance tax, prior to January 1, 2005, the Iowa Department of Revenue collected an amount equal to the greater of the pick up tax (which was equal to the federal credit for state death tax as shown on line 15 of IRS Form 706) and the Iowa inheritance tax.
What is the Future of
the Iowa 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" for short). 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 Iowa was one of them. In addition, while under the provisions of EGTRRA the pick up tax was supposed to return in 2011, the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 ("TRUIRJCA" for short) did not include reinstatement of the pick up tax. Nonetheless, the provisions of TRUIRJCA are set to expire on December 31, 2012, after which the pick up tax is scheduled to return. And since the Iowa legislature re-enacted its state estate tax effective for deaths occurring on or after January 1, 2011, Iowa will begin collecting an amount equal to the greater of the federal credit for state death tax or the Iowa inheritance tax if and when the pick up tax returns.
Does Iowa Collect a State Inheritance Tax?
An inheritance tax is a tax imposed on the individual beneficiaries of an estate, while an estate tax is imposed on the entire value of an estate. So does Iowa currently collect a state inheritance tax, as opposed to a state estate tax? The answer to this question is Yes. Iowa is one of seven states that collect a state inheritance tax. So, until the pick up tax returns, Iowa will continue to collect its inheritance tax. For more information about the Iowa inheritance tax, refer to the State Inheritance Tax Chart .