Why should cost basis be stepped-up?

[Bank of Hawk]

For those reading, I'm happy to take on any assets you want to give me even if I only keep 75% of the value. More than happy. Especially if, as is the case, I could dictate when I paid that amount in tax.

To the OP, there's really no defensible reason.

Also , usually you have 3-9 months to come up with that cold hard cash to the IRS. Your tax on a capital gain is due the following tax season unless you have prior year losses to offset the gains. So you cannot simply delay the taxes forever.

I can’t believe how many people want the government to collect more money. I think it’s a jealousy thing for most. The step up rules have a major positive impact on middle class America as well as the super rich. But the estate tax is for the super rich only and they have gotten their way and basically eliminated that.

 

[Bank of Hawk]

How the hell would it be fair to the millions of people who have planned their estate and business around the step up basis rules to have the rug pulled out?

 

[Titus Andronicus]

Clue: The "rich" avoid taxes by avoiding income. You can be VERY wealthy and not earn any taxable income.

But rich people buy stuff. Expensive stuff.

If you want to soak the rich, a consumption tax is the way to go.

Unless you just want to create a "wealth tax" which would be insane. The money would immediately leave the U.S. tax jurisdiction toot sweet.

I think Clinton put into place an excise tax that was designed to tax the purchase of small airplanes, big honking boats, super fast cars and so on. A lot of boat makers went out of business, the general aviation industry lost around half of their revenues and so on. The whole thing was eliminated after a few years of layoffs and no taxes coming in from the makers of luxury goods.

We should be careful on this one.

.................................................

Remember when John Kerry who lived in Massachusetts bought a yacht and recorded the sale in another state and supposedly kept it physically in (I think) Connecticut. ... but he seemed to be using it in Massachusetts.

When it comes to taxes on purchases, people are able to game the system a bit.

 

[prlyles]

No.

We're taxed enough as it is.

If you're looking for new sources of revenue, tax consumption, not land.

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As long as he country is in debt you can’t say taxes are too low. It is the government’s responsibility to pay for goods and services that it has given to the people. The people have told the government to do this through their vote.


Trad, this is how a real conservative thinks unlike you, Trump, and the rest of the new GOP.

 

[Brok85]

Yes that is current laws. IF there was no step up basis like OP suggested, little Johnny has to pay taxes upon transfer of the business to him from his old now deceased old man. Even if he didn’t sell it because it changed hands (again this is what the OP is advocating for- it’s not what actually happens right now).

Thanks for your responses. With equities and funds, however, taxes aren’t due when these securities are inherited - only after sold.

 

[Bank of Hawk]

Thanks for your responses. With equities and funds, however, taxes aren’t due when these securities are inherited - only after sold.

Correct that is how it works right now. But whenever assets change owners, there is usually some tax event that happens. If we did not have a step up basis, the stock that was transferred at death would be a taxable event if transferred, correct? Just because it isn’t sold , doesn’t mean a new owner doesn’t pay taxes.

 

[Brok85]

Well, as it stands, even if cost basis for securities is not stepped-up, there are still are still no tax consequence until after it’s sold. Original basis would be used.

 

[Bank of Hawk]

Yes and just like every living person , their cost basis for owning a stock or any other asset is the price at the time they obtained it. If I was the beneficiary of a dead person’s stock, I obtained that stock at the price of the stock when the dead person passed away and that would be my basis.

The first owner never sold the stock or asset so they never realized any gains, only on paper. So if they never sold the stock, why The heck should their estate all of a sudden have to pay taxes on the paper gain on something that was never sold?

 

[86Hawkeye]

.
As long as he country is in debt you can’t say taxes are too low. It is the government’s responsibility to pay for goods and services that it has given to the people. The people have told the government to do this through their vote.

True. At some point the country will have to re-enter the great debate about how much to spend and how much to tax to bring things back into a reasonable balance (a sustained period of annual deficits as a % of GDP which are less than economic growth as a % of GDP).

 

[Brok85]

Yes and just like every living person , their cost basis for owning a stock or any other asset is the price at the time they obtained it. If I was the beneficiary of a dead person’s stock, I obtained that stock at the price of the stock when the dead person passed away and that would be my basis.

The first owner never sold the stock or asset so they never realized any gains, only on paper. So if they never sold the stock, why The heck should their estate all of a sudden have to pay taxes on the paper gain on something that was never sold?

My point is the decedent didn’t paid taxes and now the beneficiary gets to step-up and avoid taxes. That’s the loophole. Nobody had to pay any taxes.

I don’t believe the beneficiary should get a tax bill for receiving a piece of paper listing the securities that were inherited. Like anybody else, they would get a 1099 form with the non-stepped up basis and the gain would simply be reported as ordinary income.

 

[Hawkeye009]

Also , usually you have 3-9 months to come up with that cold hard cash to the IRS. Your tax on a capital gain is due the following tax season unless you have prior year losses to offset the gains. So you cannot simply delay the taxes forever.

I can’t believe how many people want the government to collect more money. I think it’s a jealousy thing for most. The step up rules have a major positive impact on middle class America as well as the super rich. But the estate tax is for the super rich only and they have gotten their way and basically eliminated that.

No tax would be owed until a sale of the asset. That's American tax 101. If you made death a realization event, in contrast, tax would be owed on the transfer at death, but the heir would get a full FMV basis in the asset. (There are people who propose this, but that is a distinct proposal from what is being discussed in this thread.)

This is not a jealous my thing at all. It's just logic and consistency. Income should be taxed for everyone. Allowing a step up in basis means that we allow massive amounts of income to go untaxed while we keep tax rates high for everyone and keep piling on debt.

(If you're worried about the middle class, let people have $1 million or $5 million step up allowance. Just don't let billions go untaxed while middle class families pay at current rates.)

It also goes without saying that this doesn't even have to be about wanting more tax money. You could use the money to reduce rates for everyone. We might want to tackle the defecit and even debt at some point, but thats a whole different issue.

 

[L. Wade Childress]

Because we need tax revenue from somewhere. Because dynastic wealth is contrary to the American ideal. Because dead people are the better to tax than live people. And because our system of laws protects your property after death and gives you the ability to control who gets it rather than the person who possesses it at your death.

There are plenty of reasons to support an estate tax. There are also plenty to oppose it. But don't ignore that there are good reasons to put an estate tax into the mix.

And, again, the step up is not a trade off for the estate tax. If it were, virtually no one would get a step up because virtually no one pays estate tax.

you realize that stepped up basis combined with an estate tax is helping the vast majority of people, right? Stepped basis is not contributing to dynastic wealth. It is redirecting income tax on less wealthy individuals to the extremely wealthy in the form of estate tax, which I am fine with but there’s little justification for it other than redistributing wealth.

 

[L. Wade Childress]

My point is the decedent didn’t paid taxes and now the beneficiary gets to step-up and avoid taxes. That’s the loophole. Nobody had to pay any taxes.

I don’t believe the beneficiary should get a tax bill for receiving a piece of paper listing the securities that were inherited. Like anybody else, they would get a 1099 form with the non-stepped up basis and the gain would simply be reported as ordinary income.

a good chunk of inherited stock is for private companies. Why should someone that inherits stock have to pay gain when they still own the asset? That’s a major contradiction of tax code.

The estate tax prevents valuable companies in this situation from never being taxed.

 

[joelbc1]

No tax would be owed until a sale of the asset. That's American tax 101. If you made death a realization event, in contrast, tax would be owed on the transfer at death, but the heir would get a full FMV basis in the asset. (There are people who propose this, but that is a distinct proposal from what is being discussed in this thread.)

This is not a jealous my thing at all. It's just logic and consistency. Income should be taxed for everyone. Allowing a step up in basis means that we allow massive amounts of income to go untaxed while we keep tax rates high for everyone and keep piling on debt.

(If you're worried about the middle class, let people have $1 million or $5 million step up allowance. Just don't let billions go untaxed while middle class families pay at current rates.)

It also goes without saying that this doesn't even have to be about wanting more tax money. You could use the money to reduce rates for everyone. We might want to tackle the defecit and even debt at some point, but thats a whole different issue.

Debt and deficit are not concerns until a “D” occupies the White House. Upon a Democrats occupancy of 1600 Pennsylvania, the debt and deficit will become the nation’s #1 economic issue and completely their responsibility.and their fault. This is well documented political history of the past 50 years.

 

[Hawkeye009]

you realize that stepped up basis combined with an estate tax is helping the vast majority of people, right? Stepped basis is not contributing to dynastic wealth. It is redirecting income tax on less wealthy individuals to the extremely wealthy in the form of estate tax, which I am fine with but there’s little justification for it other than redistributing wealth.

The estate tax applies to virtually no one. And to claim that the step up doesn't contribute to dynastic wealth is just odd. That's not even really debatable and tax policy groups left and right would agree. They might not care, but they would agree.

As for the middle class effect, sure. Every tax exemption helps. But the middle class gets scraps compared to the top 1% on a nominal and comparative basis. Institute a $5 million exemption if you want to address that issue.

 

[Hawkeye009]

a good chunk of inherited stock is for private companies. Why should someone that inherits stock have to pay gain when they still own the asset? That’s a major contradiction of tax code.

The estate tax prevents valuable companies in this situation from never being taxed.

You have the effects of these taxes mixed up. Eliminating the step up would not create liquidity concerns because no tax would be owed unless and until there's a sale. The estate tax, if it applied, would require a payment of tax even without a sale.

 

[hawkifann]

Would a beneficiary even want to take on assets knowing they would have to come up with 25% of the prior owners capital gain? They might have to firesale assets that would deflate the value of that item, with the real two beneficiaries being the us government and the rich person who buys said asset at a firesale price. That’s not what the original owner probably intended when they planned their ownership of said items.

What should happen is removal of estate tax and removal of the step-up in basis. If I inherit a farm, I then assume the asset. No estate tax. I now own the asset at the basis price my parents or grandparents paid for it. No tax owed (other than on-going property tax) unless/until I sell and then the tax simply comes out of the proceeds of the sale.

 

[Brok85]

a good chunk of inherited stock is for private companies. Why should someone that inherits stock have to pay gain when they still own the asset? That’s a major contradiction of tax code.

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They shouldn’t, as has been stated, pay taxes on the gain after it was sold.

 

[Hawkeye009]

For the fiscal conservatives who distrust comments on this, why not read what the tax foundation has to say?

https://taxfoundation.org/step-up-in-basis/

At to the point made by someone above, here's a part of the conclusion: "eliminating step-up in basis removes a nonneutral tax expenditure that reduces federal revenue and primarily benefits wealthy taxpayers."

 

[Bank of Hawk]

My point is the decedent didn’t paid taxes and now the beneficiary gets to step-up and avoid taxes. That’s the loophole. Nobody had to pay any taxes.

I don’t believe the beneficiary should get a tax bill for receiving a piece of paper listing the securities that were inherited. Like anybody else, they would get a 1099 form with the non-stepped up basis and the gain would simply be reported as ordinary income.

Could get along with that solution. But also, whenever an asset is transferred either through a sale or a deed transfer or otherwise, that transfer is normally a taxable event to the extent any capital gains were realized by the prior owner. if someone dies without selling the assets, they have never realized a capital gain. So the counter argument is why should the new owner take on the unrealized gain of the prior owner?

 

[Hawkeye009]

Could get along with that solution. But also, whenever an asset is transferred either through a sale or a deed transfer or otherwise, that transfer is normally a taxable event to the extent any capital gains were realized by the prior owner. if someone dies without selling the assets, they have never realized a capital gain. So the counter argument is why should the new owner take on the unrealized gain of the prior owner?

As a trade off for allowing the transfer without requiring the payment of tax, like most transfers, as you recognize.

Making the transfer not taxable AND giving a step up is a double tax benefit.

 

[theiacowtipper]

Yes and just like every living person , their cost basis for owning a stock or any other asset is the price at the time they obtained it. If I was the beneficiary of a dead person’s stock, I obtained that stock at the price of the stock when the dead person passed away and that would be my basis.

The first owner never sold the stock or asset so they never realized any gains, only on paper. So if they never sold the stock, why The heck should their estate all of a sudden have to pay taxes on the paper gain on something that was never sold?

I think we are talking past each other. Now, if I inherit a stock, I get a step up with no tax owed unless there are estate taxes. I would argue that there should be no step up, but no taxes owed until the gain is realized.

 

[Titanhawk2]

what major problem is this addressing in the country? Oh, yeah, can't suck more money out of the income tax?

 

[Bank of Hawk]

I think we are talking past each other. Now, if I inherit a stock, I get a step up with no tax owed unless there are estate taxes. I would argue that there should be no step up, but no taxes owed until the gain is realized.

I can get on board with an unrealized gain transferring to the new owner. It could have unintended consequences as lawyers and CPAs would find a way to scheme around that. The one thing that I would recommend to anyone who is doing estate planning and retirement planning is looking at how taxes will affect your plan. Our tax code is obviously very complicated and convoluted.

If tax codes are changed, there would have to be a grandfather rule for anyone who set their assets up to take advantage of the step up rule.

 

[joelbc1]

Could get along with that solution. But also, whenever an asset is transferred either through a sale or a deed transfer or otherwise, that transfer is normally a taxable event to the extent any capital gains were realized by the prior owner. if someone dies without selling the assets, they have never realized a capital gain. So the counter argument is why should the new owner take on the unrealized gain of the prior owner?

Because, taxes, like life, are not fair? Perhaps the “transferee” should refuse the gift and let the state sell it for taxes then?

 

[Hawkeye009]

what major problem is this addressing in the country? Oh, yeah, can't suck more money out of the income tax?

Both right and left generally agree that the tax code should apply equally and not give exceptions and preferences unless there's some worthy goal being pursued. This is an example of a huge preference given overwhelmingly to the top 1% or .01%. It would be much better to tax all this income and to reduce rates for everyone than to let certain folks create dynastic wealth that forever escapes the income tax while wage earners pay tax on every penny and the country loads up on debt.

A big problem we face is that many people, like what you've done, oppose efforts that would make our system more neutral because they think it's all about revenue. So we continue to give a lot of special breaks that disproportionately benefit the very top at everyone else's expense.

Man, I'm not sure that the Republicans could pass the '86 Act today. That was all about base broadening and rate lowering. Trump and this era of Republicans have strayed very far from those roots. It's all about maintaining tax preferences for the wealthy and labelling base broadening as class warfare/jealousy now. Meanwhile, they're screwing the middle class on taxes and focusing on cutting essential safety nets in the name of fiscal responsibility. It's sad what has become of a very legitimate wing of political thought. (Though the fiscally conservative tax groups are generally holding firm. They just don't have political traction with the current GOP under Trumpism.)