Estate taxes

Tax law proposals would change what is owed

Death and taxes may be the only certainties in life, but death taxes are only a remote possibility for most people.

The majority of Americans won’t ever have or give away enough to owe estate or gift taxes. Far more people could be affected if a tax break that benefits heirs is eliminated. Feb. 10. The stock would get a new basis for tax purposes of $362,000. All the gain that occurred during her lifetime would never be taxed. If you sold the stock later, you would owe tax only on the gain since her death.

Some kinds of inheritances, such as annuities or retirement accounts, don’t get the step-up. 1

The proposal While campaigning for president, Joe Biden proposed doing away with something called the “step-up in basis” that allows people to minimize capital gains taxes on inherited assets. No legislation has been proposed yet, and it could have a tough time ever getting approved.

“Right now, we’re telling folks to start thinking about this stuff, but we’re not rushing out to take action,” said Colleen Carcone, a director of wealth planning strategies at TIAA.

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Step-up in basis basics

Although most estates don’t owe estate taxes, anyone who’s inherited a house, stock or other property has likely benefited from the tax break that gives such assets a new value at the owner’s death.

Let’s say your aunt paid $7,000 for a single share of Berkshire Hathaway. That’s her tax basis. If she sold the stock for its closing price $362,000 on Feb. 10, she would owe tax on the $355,000 gain. If she gave it to you and you sold it that day, you’d owe the same amount of tax.

Instead, let’s say she left it to you in her will and she died

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Taxes now Currently, an estate has to be worth more than $11.7 million to trigger federal estate taxes. Less than 0.1 percent of the people who died in the U.S. last year were expected to leave estates large enough to owe any tax, according to the Urban-Brookings Tax Policy Center.

These historically high limits are scheduled to end in 2025, when it reverts to $5 million per person, adjusted for inflation. Biden wants the exemption to drop to $3.5 million per person.

State tax rules will vary on inheritances.

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What to do now The idea of eliminating the step-up has been proposed in the past, but it has been difficult to advance because it benefits so many.

There’s not much people can do to prepare for a potential change other than what they should be doing anyway, which is keeping careful records. That means “tracking the basis” of what they paid for any assets as part of routine estate planning.