The stepped-up basis is a term that applies to inheritances and capital gains taxes. We will take a look at it in this post, and we will provide a succinct taxation overview.
Appreciated Assets
Let’s say that your grandfather passes away, and he leaves you 1000 shares of stock that are worth $500 each. He had a good eye for the market, and he purchased the stock many years before his death when it was going for $50 a share.
Your grandfather paid $50,000 for the stock, and while he was living, there was $450,000 of appreciation. In tax parlance, you “realize a gain” when you sell an appreciated asset. Under those circumstances, the capital gains tax will be applicable.
If your grandfather would have sold the stock before his death, he would have been required to pay capital gains tax on the realized gain. This would be a long-term gain that was realized more than a year after the asset was acquired.
In 2022, the long-term capital gains rate for single filers that claim more than $459,750 is 20 percent. It is 15 percent for people that report less than this amount but more than $41,675. Individuals that make $41,675 or less are exempt from long-term capital gains taxes.
Getting back to your tax responsibility as an inheritor, it would be zero regardless of your income, because the assets would get a stepped-up basis. The capital gains meter would be reset, and you would not be responsible for the gains that accumulated during your grandfather’s life.
Proposed Elimination of Stepped-Up Basis
When he was a candidate, President Biden proposed the elimination of the stepped-up basis for high net worth individuals. This would generate tax revenue that would ostensibly be used to expand health care access. Though the proposal never gained traction, it may reappear in the future.
Your Estate Will Probably Pass Tax-Free
There is a very good chance that the property that comprises your estate will change hands in a tax-free manner. Inheritances are not subject to income taxes unless the beneficiary is receiving distributions of untaxed earnings in a trust.
If you have a traditional individual retirement account, you make pretax contributions. As a result, distributions that you take yourself are subject to regular income taxes. This also applies to a traditional IRA beneficiary.
There is a federal estate tax, but it is only a factor for estates that are valued at more than $12.06 million. This is the exclusion, and we have a state-level estate tax in Connecticut with a $9.1 million exclusion in 2022.
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At the end of the process, you will have a carefully constructed plan that is ideal for you and your family. As time goes on, we will be well-positioned to make adjustments to your existing plan if and when they become necessary.
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Mr. Horowitz was awarded his Juris Doctor degree with honors from the University of Connecticut School of Law. While attending law school, Mr. Horowitz received the American Jurisprudence Award in Legal Ethics and the Nathan Burkan Award.
After graduation from law school, Mr. Horowitz continued his legal education at New York University School of Law where he received a Post Doctorate Law Degree in Taxation. He has also recently received a national achievement award.
Mr. Horowitz is admitted to practice before all the state courts in the State of Connecticut and the United States District Court.
Mr. Horowitz was selected for Super Lawyers in 2021.
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