concept

step-up in basis

Facts (15)

Sources

How the Government Subsidizes Wealth Inequality americanprogress.org Center for American Progress Jun 25, 2014 15 facts

claimIn 2010, the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 allowed estates to choose between the EGTRRA tax treatment (no estate tax with carryover basis) or a new regime that revived the estate tax and step-up in basis.

accountIn a hypothetical scenario, if Jill purchases a stock for $10 and dies when it is worth $50, her heir Jack inherits the stock at the $50 value. If Jack sells the stock for $55, he only pays capital gains taxes on the $5 gain that occurred after Jill's death, while the $40 gain that occurred during Jill's lifetime is never subject to income taxes due to the step-up in basis.

claimThe 'step-up in basis' provision in the U.S. tax code is a subsidy for inherited wealth because it allows the basis of an asset to be adjusted to its current value upon inheritance, rather than the original purchase price, when calculating capital gains upon sale.

claimThe step-up in basis rule creates a lock-in effect by providing investors with a financial incentive to hold onto assets until they die to avoid capital gains taxes.

measurementThe step-up in basis for inherited assets costs the government $644 billion over 10 years.

measurementAccording to the Congressional Budget Office, 21 percent of the federal revenue reduction caused by the step-up in basis rule benefits the top 1 percent of income earners.

claimRepealing step-up in basis and low tax rates for capital gains and dividends would keep the national debt on a downward path as a share of GDP through the end of the five-year budget window analyzed by the Congressional Budget Office.

claimWealthy individuals can combine the step-up in basis rule with like-kind exchange rules to avoid incurring taxable capital gains.

claimStep-up in basis is a tax rule where the basis of inherited property is calculated as the fair market value of the asset on the date the previous owner died, rather than the original cost of the asset.

measurementThe Congressional Budget Office estimates that the step-up in basis rule will reduce federal revenues by $644 billion over a 10-year period.

accountCongress repealed the step-up in basis rule in the Tax Reform Act of 1976, replacing it with a carryover basis rule where the heir's basis is the same as the decedent's basis, meaning taxable capital gains on an asset are not affected by inheritance.

measurementThe Congressional Budget Office (CBO) estimated that the total 10-year cost for major tax expenditures, including step-up in basis and reduced rates on capital gains and dividends, was $1.984 trillion from 2014 to 2023.

claimThe Bowles-Simpson commission and the Domenici-Rivlin commission both recommended repealing the step-up in basis for inherited assets.

claimIf the federal government eliminated step-up in basis and reduced tax rates on capital gains and dividends, federal revenues would be sufficient to cover all federal programs over the 2014-2023 period, resulting in a primary budget surplus.

claimRepealing step-up in basis broadens the capital gains tax base, but the Office of Management and Budget (OMB) and the Congressional Budget Office (CBO) assume this broader base is taxed at current reduced capital gains rates rather than higher rates.