Biden’s Tax Proposal and the “Step-Up in Basis”: What it Means for Your Estate Plan or Trust
A commonly utilized tax law in estate planning considerations, known as the “step up in basis,” may be in jeopardy. The “step-up,” derived from section 1014 of the Internal Revenue Code, gets applied to the cost basis of property when it is transferred upon death of the transferor. This mechanism has been a beneficial way to minimize the capital gains tax of one’s heirs, especially for property that has greatly appreciated over time. For example, if someone buys a home for $100,000 dollars, and fifty years later the owner sells the home at a time when the home has appreciated in value to $1,000,000, there would be a capital gain of $900,000, to which a long-term capital gains tax rate of 20.00% is applied. However, if the owner dies owning the home, and the home is transferred upon the homeowner’s death at a time when the home has appreciated in value to $100,000, the step up in basis converts the original cost basis to the fair market value of the transferred property at the time of the homeowner’s death. Thus, if the persons inheriting the property were to immediately sell it for $1,000,000, there would be zero capital gain, because the basis is equivalent to the sale price. The step-up in basis has allowed for taxpayers to save tremendous amounts of money on capital gains tax. Note that, although it is often referred to as a “step-up” in basis, it could be a “step-down” if the value of the property a the time of death is less than what the owner purchased it for.
However, the Biden Administration has proposed to eliminate the step-up in basis. In short, this means that heirs will have to pay capital gains tax on inherited assets based upon the cost basis of the donor’s purchase price. According to Biden’s proposed tax plan, there would still be an exemption for capital gains on the first $1,000,000 of capital gains ($2,000,000 for married couples), but gains above the $1,000,000 ($2,000,000 for married couples) will not receive step-up in basis treatment.
In addition to a repeal of the step up in basis, the proposed plan also seeks to increase the capital gains tax rate, which may further amplify the tax bill of those inheriting property. Under the proposed plan, the capital gains rate, which is applied to property held for more than one year, would increase from 20% to 39.6% percent for individuals earning 1 million dollars or more for the taxable year. In conjunction, these two proposals could result in millions of dollars in additional tax bills for some individuals.
It remains to be seen what the final law will be, and the arduous process of getting a bill passed through Congress is never a sure thing. Nevertheless, it is always important to know what could be on the horizon, and to plan ahead of the curve. If you are interested in learning more about tax planning and tax strategies, do not hesitate to contact the attorneys of Chepenik Trushin LLP, Bart Chepenik, JD LL. M. (Taxation) at 305-613-3548 or Brad Trushin, Esq., 305-981-8889, who are ready, willing, and able to assist with your estate tax planning needs.