What Is a Pick-Up Tax?

A pick-up tax is a type of tax obligation that will sometimes allow a state or provincial tax agency to impose a tax on the estate of a recently deceased taxpayer, effectively diverting funds that would have been taxed by a national or federal government. A tax of this type is more common when the state jurisdiction does not impose any type of estate or death tax that would result in receiving some amount from the estate of the deceased. Essentially, this means that the state tax agency is picking up a portion of the taxes that would go to the national revenue agency if there were some sort of death or inheritance tax imposed at the local level.

The use of a pick-up tax is common in the United States. Since some states do not impose estate, death, or inheritance taxes, this means that the tax assessments focus squarely on the regulations and tax laws that are enforced by the Internal Revenue Service (IRS). In some cases, estates do not meet the minimum requirement for taxation at that level, and may or may not be subject to a pick-up tax as a result. When the state does have provisions for estate or death taxes in place, there is usually not any type of pick-up tax assessed.

One of the benefits of using a pick-up tax approach is that the process typically calls for picking up a percentage of whatever taxes are assessed by the IRS. This means there is no need for the sometimes complicated formulas used to determine the amount of estate or death taxes owed. From this perspective, the process is very simple and straightforward, making it easier for the state to identify the amount owed and for the executor of the estate to make sure that amount is paid.

A possible drawback to the pick-up tax approach is that if the IRS determines that not estate taxes are due to the federal tax agency, this means that the state will also receive nothing in the way of tax payments on that estate. For this reason, a number of jurisdictions within the United States choose to create and make use of tax laws that do include the assessment of estate or death taxes. In other parts of the world, the idea of a pick-up tax is not found in the local or national tax codes of many nations.