Menu
HARIK THOMPSON CPAs
  • About
    • Team
      • Patricia Harik
      • Kevin Thompson
    • Affiliation
  • Services & Industries
    • Accounting Services
    • Business Consulting
    • Entertainment Industry
    • Estates and Trusts
    • Financial Planning
    • International Taxation
    • Tax Strategies
  • Insights
  • Client Resources
    • SafeSend
    • Tax Forms & Resources
  • Payments
  • Contact
  • About
    • Team
      • Patricia Harik
      • Kevin Thompson
    • Affiliation
  • Services & Industries
    • Accounting Services
    • Business Consulting
    • Entertainment Industry
    • Estates and Trusts
    • Financial Planning
    • International Taxation
    • Tax Strategies
  • Insights
  • Client Resources
    • SafeSend
    • Tax Forms & Resources
  • Payments
  • Contact

Step-Up in Basis Rule is an Heir's Best Friend

5/10/2023

 
The step-up tax adjustment has been under siege for decades but has so far survived the onslaughts. The provision, which reduces capital gains tax for estates, has been controversial since the 1970s. Policymakers would still love to get their hands on the bonanza in tax revenues it represents.
There is a counterargument: If the law were repealed, assets held though multiple generations would suddenly become liable for substantial tax bills. Besides, imagine the misery of trawling through decades-old documentation to try to reconstitute transactions! In any case, the step-up basis is destined to remain a flashpoint for estate accounting.

How it works
The story begins in 1916, when federal estate tax law was adopted. (Before 1916, temporary death taxes were enacted to raise funds earmarked for special projects such as the formation of the Navy or underwriting the Civil War.) The step-up itself was introduced in 1921 for all types of assets, ranging from real estate to stocks and bonds. The purpose was to avoid double taxation on unrealized appreciation after assets had already been taxed once at fair market value.

The step-up serves as a valuation method of any asset after the owner dies. Essentially, it resets the cost basis for inherited assets, which is to say the original value of the asset, adjusted for commissions, expenses, depreciation, etc. The step-up propels that number forward to be assessed as of the day the owner dies. The intervening years, when the asset may have appreciated, no longer count in the calculation of capital gains tax. In reverse, if the asset has in fact lost value over this time period, the step-up would be negated.

Estates can employ several exceptions. Instead of using the date of death, the personal representatives can opt for a date six months later, assuming the later date reduces the estate's tax bill. If they go that route, all property must be lumped together for valuation purposes. Representatives cannot select only the advantageous assets. The IRS is also mindful to circumvent tax-designed acquisitions, so the step-up is ruled out for any transfer from heir to owner enacted within a year of the owner's death.

A costly loophole
Various administrations have struggled to close what they interpret as an elitist loophole, on the grounds that it disproportionately benefits larger estates. So far, they have not succeeded. Repeals advocated by presidents Clinton, Obama and Biden were all unsuccessful.

Fairness arguments aside, there is also a lot of money at stake for government coffers. According to the Congressional Budget Office, replacing the step-up with the original cost basis would generate about $110 billion over 10 years. The federal Joint Committee on Taxation likewise ascribes $42 billion of lost revenues to the step-up in 2021 alone.

The step-up was repealed in 1976, reinstated in 1980, and again challenged and reversed in 1980, in the wake of complaints about record-keeping for old transactions. Recently, opponents of the rule argue that the double taxation concern has lost its teeth when so few pay the federal estate tax anyhow now that the exemption is over $12 million. Opponents also cite revenue distortions. They claim that the step-up promotes a lock-in effect, whereby asset owners resist selling to avoid paying capital gains tax, hindering portfolio choice and liquidity.

Watch out for changing legislation
As a beneficiary, you can use the step-up to minimize your capital gains costs in the estate. You might not even be the first in your family to do so. Successive heirs over many years could keep passing on a property, taking the step-up in each generation and paying little capital gains tax.

Nevertheless, try to keep up to date with any new proposals for eliminating the tax break. Those with real estate in New York City, Los Angeles and other expensive metro areas will have likely seen their home prices escalate. They may withstand the worst of any changes in legislation, while financial portfolios are also affected.
​
Like so many other tax rules, step-up can get complicated. If you have an inheritance or are planning to leave one, be sure to discuss the details with a professional to make sure you're taking step-up rules into account.

Comments are closed.

    Newsletter articles are posted every 2 weeks. ​

    If you would like to have our e-newsletter delivered directly to your inbox, please sign up. Your information is confidential; you can unsubscribe at any time. Subscribe.

    Categories

    All
    1040-X
    1099 Form
    2021 Adjustments
    401Ks And IRAs
    529 College Savings Plans
    941 Form
    ACA Affordable Care
    Accounts Receivables
    ADA Americans With Disabilities Act
    Alternative Minimum Tax
    Annuities
    ASC 606
    Audits
    Back Pay
    Backup Withholding
    Bankruptcy
    Basis
    Benefit Transfers
    Blockchain
    Bonuses
    Budgeting
    Business Closure
    Business Deductions
    Business Interest Expense
    Business Interruption Insurance
    Business Structure
    Business Taxes
    Business Tips
    Capital Gains
    CARES Act
    Cash And Accrual
    Cash Flow
    Charitable Gifts
    Commercial Real Estate Vacancies
    Communication
    Compensation
    Coronavirus
    Coronavirus Relief Package
    Credit Cards
    Credit Score
    Crowdfunding
    Death And Debt
    Debt
    Deductions
    Depreciation
    Disaster Relief Payments
    Disaster Tax Break
    Diversity Training
    Dividends
    Divorce
    D&O Insurance
    Dollar Cost Averaging
    Down Payment
    Dress For Success
    Earned Income Tax Credit
    Economic Injury Disaster Loan
    Education Credits
    EIN Employee ID Numbers
    EITC
    Elder Mediation
    EmEmployee Classification
    Employee Direct Deposit
    Employee Leave
    Employee Overpayment
    Employee Ownership
    Employee Pay
    Employee Retention Credit
    Employees Cross State Lines
    Employee Taxes
    Employment Record Keeping
    Employment Taxes
    Entertainers
    ESOP
    Estate Planning
    Estate Taxes
    Estimated Taxes
    Executor
    Expenses And Depreciation
    Expensing Rules
    Family Businesses
    Family Leave
    FATCA
    Federal Excise Tax
    Fiduciary
    Filial (Adult Child) Responsibilities
    Filial Responsibility
    Filing Status Options
    Financial
    Financial Advisor
    Financial Planning
    Flood Insurance
    Floods
    Foreign Earned Income
    Franchise Ownership
    Fraud
    Freelancing
    Furloughs
    Harik Thompson Merger
    Headcount Reporting
    Health Care
    Health Savings Account
    HIPAA
    Hiring Compliance
    Hiring Help
    Hiring Tax Credits
    Hoaxes
    Hobby Vs. Business
    Home Equity Loans
    Home Office
    Homeowners
    Homeowners' Deductions
    HSA
    Hurricanes
    IC-DISC
    Identity Theft
    Income Tax
    Independent Contractors
    Inflation
    Information Return
    Inherited Mortgage
    Innocent Spouse Rule
    Insurance
    Intangible Assets
    Intestate
    Inventory Management
    Investing
    Investors For Your Business
    IRAs
    IRS CP2000
    IRS Disagreements
    IRS Identity Protection PIN
    IRS Representation
    IRS Rights
    Joint Tenancy
    Key Performance Indicators
    Kiddie Tax
    Layoffs
    Lease Accounting
    Leave
    Legacy
    Life Insurance Trusts
    Loans
    Long Term Care Insurance
    Managing Employees
    Market Capitulation
    Marriage Penalty
    Maternity And Paternity Leave
    Medicaid Trust
    Medical And Dental Deductions
    Medicare
    Mergers
    Mileage Rates
    Morale
    Mortgages
    Multistate Taxes
    Myers-Briggs Personality Types
    Net Investment Tax
    Net Pay
    New
    Newsletters
    New Tax Law
    Noncompete Agreements
    Operating Loss
    Opportunity Zones
    Organize Your Finances
    OSHA
    Outsourced Accounting
    Overtime Exemption
    Padding
    Pandemic Planning
    Papers For Taxes
    Part-time Help Tax Rules
    Passwords
    Payable On Death Accounts
    Paycheck Protection Program
    Payday Changes
    Payday Frequency
    Payroll Cards
    Payroll Goals
    Payroll Scams
    Payroll Taxes
    Pensions
    Personal Finances
    Power Of Attorney
    PPP Loan
    Prenup
    Private Tax Debt Collection
    Profit Sharing
    Property Taxes
    Protecting Wealth
    QSEHRA Benefits
    Quarterly Tax Returns
    R & D Tax Credit
    Real Estate 1031 Exchange
    Real Estate Held In IRA
    Real Estate Investment Trusts
    Reciprocal Agreements
    Records
    Recovery Rebate Credit
    Referral Program
    Refinance
    Rehiring Staff
    Remote Employees
    Reporting
    Reputation
    Retirement
    Revenue Recognition
    Reverse Mortgage
    Sales Tax
    SBA Loans
    Schedule C
    Schedule K-2 And K-3
    S Corporations
    Self Employment Taxes
    Severance Pay
    Sexual Harassment
    Sharing Economy Tax Implications
    Sick Leave Rules
    Small Business Administration
    Social Media
    Social Security
    Spendthrift Trust
    State And Local Taxes
    Student Loans
    Success
    Succession Plan
    Supplemental Wages
    Supply Chain Risks
    Tariffs
    Tax Brackets
    Tax Breaks
    Tax Changes
    Tax Credits
    Tax Debt Collection
    Tax Deductions
    Tax Forms
    Tax Implications
    Tax-Loss Harvesting
    Taxpayer First Act
    Tax Planning
    Tax Preparation
    Tax Reform
    Tax Refunds
    Tax Scams
    Tax Tips
    Trump's Tax Law
    Unemployment Tax
    Unmarried Partners
    W-2 Form
    W-4 Form
    W-4 Requests
    Wage Garnishments
    Wages And Overtime
    Wildfire Solution
    Wills And Trusts
    Withholding
    Work Opportunity Tax Credit
    Year End Tax Considerations

    RSS Feed

Proudly powered by Weebly