The answer to the question is No, Virginia currently does not collect an estate tax at the state level. However, several years ago, things were different. Before the coming into effect of the significant changes in the federal estate tax law on January 1, 2005, Virginia collected separate estate tax at the state level known as “sponge tax” or “pick-up tax,” equal to a portion of the entire federal tax bill.

What Is Sponge Tax or Pick-Up Tax?

It is a state estate tax collected based on the state estate tax credit allowed by the IRS on the federal estate tax return before January 1, 2005. Different states had different tax laws regarding the pick-up tax which meant that the amount that states collected would vary depending on the state’s estate tax laws. However, the total estate was in essence not decreased or increased because of the pick-up tax.

Instead, the state taxing authority and IRS apportioned the overall tax bill. Simply put, it means that a share of the federal tax law was diverted from the IRS and paid to the state taxing authority of the decedent. Before January 1, 2005, the Virginia Department of Taxation would collect pick up tax from the decedent Virginia resident’s estate if he or she owed any federal estate taxes.

What Is The Future of Estate Tax in Virginia?

Pick up tax was officially phased out under the provisions of the Economic Growth and Tax Relief Reconciliation Act is also known as EGTRRA, which came into effect starting January 1, 2005. Some states that previously collected pick up tax decided to enact laws that permitted the state to continue collecting state estate tax in response to changes in federal law phasing out pick-up tax.

Most states did nothing and thus no longer raised state estate tax, but Virginia was among the few that enacted separate property tax. However, it was short-lived estate tax imposed for deaths occurring between January 1, 2005, and June 30, 2007. Virginia stopped collecting estate tax for deaths occurring on or after July 1, 2007.

The provisions of EGTRRA were supposed to resume in 2011 but didn’t because of the enactment of 2010’s Tax Relief Unemployment Insurance Reauthorization and Job Creation Act also known as TRUIRJCA that reinstated federal estate taxes without actually bringing back pick-up tax.

The provisions of TRUIRJCA were supposed to expire on 31st December 2013, but the federal law passed the American Taxpayer Relief Act also known as ATRA in 2013. Under ATRA’s provisions, rules governing federal estate taxes as stipulated in TRUIRJCA became permanent which means that pick up tax was not reinstated in 2013 and will probably never come back without Congress first approving it.

So, Does the State of Virginia Collect Estate Tax?

While it is true that it previously used to do so, this is no longer the case since the legal landscape has completely transformed. Simply put, it means that you should not expect Virginia to start collecting estate tax anytime soon.

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Misha is an estate planning attorney for his firm, Speedwell Law, PLLC. If you would like assistance in setting up your own estate plan, Misha can be reached at (703) 553-2577 or use the contact form.

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