It would also make the code more progressive and increase auditing costs for the Internal Revenue Service (IRS).
On the other hand, repealing step-up in basis would make the code more neutral with respect to assets relative to income and gifts. This occurs due to the taxes that would apply in the absence of step-up in basis on property transferred to heirs: an estate tax on the total value of an estate’s property, as well as capital gains taxes on any appreciation within the property’s assets. While it is less than neutral for capital gains to entirely escape taxation, as can occur due to step-up in basis, the policy also mitigates what would otherwise be a significant effective tax rate on saving. Eliminating step-up in basis would encourage more realizations, increase federal revenue, and remove a tax expenditure that allows taxpayers to entirely exclude returns on saving from taxation. Under the current system of capital gains taxation, step-up in basis discourages people from realizing their gains. There are many trade-offs to repealing step-up in basis. If the heir chooses to sell the property, any tax would be assessed on the new basis, which means that only asset appreciation after the asset had been inherited would face capital gains tax. This process, called step-up in basis, means that any appreciation in the value of the property that occurred during the original owner’s life goes untaxed. Under current law, the tax basis of property transferred to an heir at death is increased to its current market value. In the event these investors never sell their assets, these assets are not subject to capital gains taxes.Īs investors acquire and retain assets over time, the value of these assets fluctuates.
Some assets are held for generations and passed from their original owners to heirs. It is not until a person realizes a capital gain (sells an asset for a profit) that capital gains taxes are due. Capital gains, or losses, refer to the difference between an asset’s purchase price (basis) and its value at the time of sale. The purchase price of an asset is typically referred to as the asset’s basis. While repealing step-up in basis would raise substantial revenue relative to current law, it would reduce national saving and total wealth and increase compliance costs for the government and taxpayers. Some candidates propose changing the tax treatment of deferred assets, specifically assets passed onto heirs after death.įor example, shortly after launching his campaign, President Biden proposed repealing step-up in basis for capital gains. With Super Tuesday approaching, the six top Democratic presidential candidates continue to hone their tax proposals in order to address income inequality and raise additional federal tax revenue.
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