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Death and Taxes: The Tax on Death in America

  • When you die in America, will your money die with you?

They say the only things that are certain in life are death and taxes. Joe Biden’s American Families Plan might just put that to the test. His capital gains tax proposal would eliminate the “step-up in basis” loophole for estate taxes. This, combined with the current maximum estate tax rate of 40% can put a hefty price tag on dying.

Current Estate Tax

Under the TCJA, the estate tax only applies to assets owned by individuals worth more than $11.4 million per individual ($22.8 million for couples) with anything under that threshold being exempt.

Biden’s Plan

Biden, in addition to raising the capital gains tax rate, plans to tax unrealized capital gains at death. Currently, assets can be passed to inheritors without accruing a tax payment, so long as the asset isn’t sold, this is incorporated in the idea of a “step-up in basis.”

Step-Up In Basis, Explained

“Step-up in basis” refers to the readjustment in value that an asset receives when being passed down. This is done for tax purposes and effectively reduces the amount of tax liability successors would take on upon selling an inherited asset. “Step-up in basis” readjusts the purchased value of an asset to match current market value.

By increasing the value of an asset upon inheritance, less tax liability is incurred due to inheritors making less in capital gains.

For Example…

You inherit a house that was originally purchased for $100,000. You receive the house while it is valued at $250,000. After a few years, the house is sold for $300,000. The capital gains are now “realized.”

Without Step-Up:

You are taxed on the full $200,000 of capital gains that accrued since the original purchase of the house.

With Step-Up:

You are taxed on $50,000 of capital gains that accrued since you inherited the house.

Eliminating the step-up in basis could open up some families to extreme tax liability upon death, which could call for extreme changes in estate planning. Need assistance with your estate planning? Call our experts at 516-541-6563 and visit our website for more information.

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