Update on Step Up In Basis for Estate Plans in New Jersey

NJ Inheritance TaxPresident Joe Biden was less than candid when he promised not to raise taxes on the middle-class during his campaign. This is contrary to my previous general impression.

There is an obscure provision in his American Families Plan. It proposes to not only increase the rate of taxes on capital gains but also to eliminate the “step up in basis” rule. A significant increase in government revenue will result if both of these provisions are adopted.

I explained in a prior blog that the increase in the value of assets held prior to death escapes taxation upon the death of the decedent. Only those capital gains which occur between the decedent’s date of death and the date when the asset is eventually sold by the beneficiary are taxable.

This “step up in basis” rule has been in existence for about 100 years. The law appears in Section 1014 of the Internal Revenue Code. It states there that the “basis” of inherited assets rises to “the fair market value of the property at the date of the decedent’s death.”

There are two key elements of the president’s proposed tax revision. One includes increasing the highest rate of capital gains to 39.6%. The second totally eliminates the step up in basis provision. Not surprisingly, both proposals should generate over $110 billion over 10 years.

The drafters included a sweetener as presently proposed. Namely, the bill includes an exemption of $1 million for individuals and $2 million for married couples.

I suspect many middle-class families might not agree this is a sweetener. For them, it might not be so unusual for grandpa and grandma to have enjoyed appreciation in excess of $2 million on investments retained over a long lifetime.

Interestingly, the Biden proposed revisions do not include a reduction in the $11.7 million per-person estate tax exemption as of yet.

I do know that one thing is certain. The Senate and House Republicans will vigorously oppose the elimination of the “step up in basis” rule.

Then again, the American Families Plan or a stand-alone tax bill may still yet pass. Democrats in the House of Representatives do hold a minute margin. It could pass in the Senate via the Reconciliation process with the Vice President breaking a tie.

The first in this series began with “Estate Planning | NJ Inheritance Taxes | Stock Appreciation” earlier this month

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