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 (540) 720-5656.
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Megan Jones joined the ILG Financial team in 2020 as marketing director. Megan and her husband live in Fredericksburg, VA with their German Short Haired Pointer, Gus. Megan is a graduate of Longwood University and holds a degree in communications. Megan is the oldest of Dave Lopez’s three children and not only enjoys working alongside her father, but also with her cousin, Chase, who joined the ILG Financial team in 2020 as an advisor. Megan is also a fully licensed Life, Health, and Annuity agent. When not at work, Megan enjoys sitting on the back porch with family and friends enjoying food and music.
Amy Anderson joined the ILG Financial team in 2023 as the client relations coordinator. Her responsibilities include scheduling of appointments, annual check-up notifications, and annuity and required minimum distribution assistance. She is a graduate of Harding University with a degree in Computer Information Systems. Amy and her husband have two children and she enjoys reading, crocheting, music and spending time with her family.
Terri Center joined the ILG Financial team in 2019 as client services manager. She handles client records, application processing, and gathering information to provide a professional and friendly experience with all of our clients. Terri is a graduate of Oakland University. She is married and has two children. She enjoys hiking, family time, and puzzle challenging video games. She also likes to share her creativity in her canvas paintings and sewing projects.
Jessica Carson joined the ILG Financial team in 2018 as an agent. Jessica and her husband have four children, two dogs, 3 barn cats, 5 chickens, and three parakeets. She indeed loves her children and pets! When not at work, Jessica enjoys playing the piano and cello as well as traveling and spending time outside with her family, hiking, fishing, and boating.
Chase Lopez joined the ILG Financial team in 2020 as an advisor. Chase is a 2016 James Madison University graduate with a degree in management. Chase has been trained under the tutelage of Dave Lopez, who is not only the founder and managing member of ILG Financial, but also is Chase’s uncle and godfather. He also enjoys working alongside his cousin, Megan, who is Dave’s daughter.