During his presidential campaign, Joe Biden proposed repealing the step-up in basis for capital gains. Income tax law has always provided that the value of inherited assets, like a family business, is “stepped up” to its fair market value when the owner dies.
So, if the founder of a family business died in August of 2019, the value of the business would be calculated in August of 2019; let’s say $1 million for this example. If the heirs continue to operate the business for a year or so, and then sell it in December of 2020 for $1.2 million, they would only be taxed on the difference between the selling price and the value of the business at the time it was inherited – $200,000. Under the Biden proposal, the heirs would be taxed on the difference between the selling price for the business and the decedent’s basis – a much greater number!
The elimination of basis “step up” isn’t just going to affect inherited businesses; it would affect all inherited assets – including bank accounts, stocks, bonds, mutual funds, and real estate properties. That house your parents bought way back when? You guessed it! Their heirs will now be required to pay taxes on the total gain from the time it was purchased it to the time it is sold. And that AT&T stock your Aunt Millie has? The one in which she’s re-invested most of her dividends over God-knows many years? Good luck figuring out the cost basis on that!
This proposal should be all over the news, but it isn’t. Probably because this proposal is difficult to explain in a ten-second sound bite. So make sure to keep a lookout for these sorts of “quiet” changes to taxes that often are unreported or overlooked by the media.
While it is impossible to know if or when this tax proposal will become law, or what the actual legislation will be, it is true that this proposal and other tax changes will be more likely, given that the Democrats control both houses of Congress and the Executive branch.
With so many unknowns at play, it is important to discuss the potential impacts of these proposed changes with a trusted estate and tax planning attorney sooner rather than later.
Willi Law Office, LLC has been providing personalized tax and estate planning services to individuals and businesses in Westerville and Central Ohio for over 20 years.