Since taking office, President Biden has expressed his intention to close the step-up in basis loophole as a means to debt reduction. For some investors, this causes alarm as they were planning to use this loophole to leave investments to their heirs without passing on the tax liability.
Under current law, investors are generally taxed on their capital gains—but if the loophole’s used, there may never be gains upon which to pay taxes. When a person dies and passes an asset onto an heir, the “basis” (assumed purchase price) of the asset is “stepped-up” to reflect its current value. When the heir sells the asset, they only pay taxes on the capital gains accrued while the asset was in their possession. This creates a substantial loophole where step-up in basis rules allow some capital gains to escape taxation altogether.
There are two main ways to close the step-up in basis loophole: tax capital gains at death or replace step-up in basis with a carryover basis. The former would impose capital gains taxes before the basis of an asset is stepped up, while the latter would require the inheritor to pay capital gains taxes based on the original basis of the asset at the time of sale.
Looking at it from President Biden’s view, addressing step-up in basis would improve fairness between taxpayers in similar situations (“horizontal equity”) while also improving the progressivity of the tax code (“vertical equity”). Reforming step-up in basis, whether by replacing it with carryover basis or a tax on capital gains at death, would generate substantial revenue. According to the Congressional Budget Office, replacing the step-up in basis with a carryover basis would generate $110 billion of revenue over a decade. Reforming step-up in basis has support from those on both sides of the aisle and from many tax experts. Doing so would improve fairness, efficiency, and revenue collection, and it should be part of the discussion of paying for reconciliation.
If you’re planning to leave investments to heirs, and thought this loophole would be beneficial, it might be worth a conversation to prepare your estate plan with some contingencies should this option go away. Contact the financial professionals at our office today.
This document is for educational purposes only and should not be construed as legal or tax advice. One should consult a legal or tax professional regarding their own personal situation. Any comments regarding safe and secure investments and guaranteed income streams refer only to fixed insurance products offered by an insurance company. They do not refer in any way to securities or investment advisory products Insurance policy applications are vetted through an underwriting process set forth by the issuing insurance company. Some applications may not be accepted based upon adverse underwriting results. Death benefit payouts are based upon the claims paying ability of the issuing insurance company. The firm providing this document is not affiliated with the Social Security Administration or any other government entity.
By clicking on these links, you will leave our server, as they are located on another server. We have not independently verified the information available through this link. The link is provided to you as a matter of interest. Please click on the links below to leave and proceed to the selected site.