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State estate tax uncertainty

By Kay Bell ·
Tuesday, February 15, 2011
Posted: 1 pm ET

We are smack-dab in the middle of the federal tax filing season. That means most of us have been focusing on what the Internal Revenue Service wants from us by April 18.

But for those of you living in one of the 43 states (and the District of Columbia) that collect some form of income tax, you need to be working on those filings, too. If you're unsure of your state's policy, check out the slide show of the states with no income tax.

I'm pleased to note that Bankrate offers state help, too. Our annually updated directory of state tax pages has lots of information not only on state income taxes, but also on sales taxes, property taxes and estate and inheritance taxes.

It's that last category that's getting a lot of attention of late.

Most states base their estate tax laws on the federal system. Before the Bush-era tax cuts, most states automatically collected their estate tax money based on the federal return's state estate tax credit.

This so-called pick-up or sponge tax was phased out as Uncle Sam started paring back the federal estate tax. As part of that process, at the end of 2004 the state estate tax credit disappeared. Unless states decoupled from this piggyback system, that meant that the states' estate taxes disappeared, too.

Theoretically, with the return in 2011 of the federal estate tax, those states' estate taxes should be back on the books, too. But some state legislatures need to take a look at the next step.

There's speculation that because the federal estate tax is officially still temporary -- it's set to expire again at the end of 2012, and President Barack Obama's just-released fiscal year 2012 budget proposes making the estate tax permanent at its 2009 level of a 45 percent tax on estates worth more than $3.5 million -- many states will opt to leave their estate taxes alone until the federal system is more set. That means some states will continue to forgo collection of the estate tax for the next few years.

But others, given their economic straits, might opt to join the ranks of states that go it alone when it comes to estate taxes. By decoupling from the federal tax, they could have some certainty in collecting this type of state tax revenue.

I realize that few of us will have to deal with estate tax issues on either the federal or state levels. Thank goodness for that, for personal as well as tax reasons.

But I bring up the estate tax because careful readers of the updated Bankrate state tax pages will note that there is a recurring theme in most of the estate tax sections. Most note that the state no longer collects an estate tax. That's because the state pages deal with the 2010 tax year, since that's the one we're concentrating on right now when it comes to filing.

As Congress and state and District of Columbia lawmakers deal with the estate tax, we'll reflect any changes here.

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