Understanding the basics of “Basis”

The term “basis” arises frequently in tax law. On your 2021 income tax return, you must declare this amount as capital gains to the IRS and your state tax authorities, and it will be liable to federal and perhaps state tax (depending on your state of residence).

Stepped-Up Basis & Inheritance: A stepped-up basis is a basic tax concept used in estate and tax planning. A person who inherits property from a decedent’s estate is given a new basis for the property equal to the fair market value of the property on the decedent’s death date, according to Section 1014 of the United States Code.

As a result, someone who inherits property can sell it with minimal or no capital gains tax. Families that plan to pass on highly appreciated property such as land, company shares, or a family business rather than selling or giving it can save a lot of money on taxes.

Carry-Over Basis & Transferring Property: Property given as a lifelong gift from the property owner directly to an individual or an irrevocable trust for the benefit of another person is subject to a separate basis rule.

It may be beneficial to transfer property out of your estate in some situations, such as when a particular property is rapidly appreciating or your estate is substantial enough to be subject to estate taxes. This avoids the 40% estate tax on property that passes to your beneficiaries or heirs after you die and is not covered by the estate tax exemption.

The Impact of Changing Basis: The Biden administration has been openly exploring the idea of eliminating the step-up in basis rule or at least modifying it significantly, to increase tax revenues on property passing from generation to generation. 

Conclusion: It is too early to tell whether President Biden has the political capital to push such an impactful tax law change through Congress. However, if President Biden is successful, rest assured that tax and estate planning advisors will be working overtime to find creative and effective tax-minimization solutions for their clients. Although the future may be uncertain, we are committed to keeping you informed about the changing landscape.

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