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 at (603) 261-3736.
Bob has a passion for making your money work hard for you. He takes profound joy in ironing out a plan for a long and comfortable retirement, no matter what your current income or level of wealth. With a work ethic second to none, he has a zeal for transforming uncertainty into stable ways for you to protect your future and your family. He knows that the quality of your life you enjoy today can remain as rewarding—or even better—after retirement.
With a strong background in information technology, Carol is instrumental in building operational policies and strategies that keep the organization functioning smoothly. Carol’s organizational skills and her flexibility to jump from priority to priority along with her commitment to customer service makes her an essential part of the Grimard Financial team. When Carol is not working with the Grimard Financial Family, she is a very creative and accomplished photographer.