Historically in a presidential election year, tax topics are widely discussed and debated between opposing candidates. This year is no different. The candidates have varying views when it comes to the tax planning strategy of stepped-up basis. The elimination of stepped-up basis would result in a significant increase in estate taxes for millions of Americans.
What assets are affected?
Stock portfolio or real property.
What is Cost Basis?
The amount of an asset when purchased. For example, in the year 2000 Sally purchased a house for $100,000. The basis in the house is $100,000.
What is Stepped-up Cost Basis?
An inherited asset at its current market value as opposed to the basis of the person they inherit the asset from. For example, Sally dies in 2020 and the house is worth $300,000. Sally’s heirs will inherit the asset at the current market value in 2020 ($300,000) as opposed to the basis of when Sally purchased the house in 2000 ($100,000).
What does this mean with Stepped-up Cost Basis?
When Sally’s heirs turn around and sell the house after she passes, their basis is at $300,000, wiping out the capital gain tax that would have been imposed on the gain. (Gain = Sale Price – Cost Basis)
What does this mean if there is not Stepped-up Cost Basis?
When Sally’s heirs turn around and sell the house after she passes, their basis is at $100,000, with results in a gain of $200,000 that will have a capital gains tax imposed. The current top tax rate is 20%, with a proposed top tax rate similar to the ordinary income tax rate (39.6%) on the gain.
One of the additional proposed modifications to the step-up in basis of an appreciable asset, is the gain could be taxed not only if an appreciable asset is sold, but also would automatically be triggered by simply inheriting this type of asset.
The year 2020 will go down in history as one of the most challenging years for American people due to the financial impacts of the Corona Virus. These proposed changes to appreciable assets will have additional financial impacts on millions of portfolios and next generation transfers. If this tax on unrealized gains happens, people will need to rethink their investments and estate plans. Now more than ever, it’s time to rethink investment strategies and have an estate plan created or have an existing estate plan reviewed immediately.