Biden Hopes to Eliminate Stepped-Up Basis for Millionaires
As part of his American Families Plan, President Biden wants to change the way capital assets are taxed when you die.
![picture of last will, financial statements, a calculator, a pen, and eye glasses on a table](https://cdn.mos.cms.futurecdn.net/mSnczed2cZeJRuDKfVV6Ub-415-80.jpg)
If President Biden gets his way, many wealthy Americans will no longer be able to pass stocks, real estate, and other capital assets to their heirs when they die without paying capital gains tax. He wants to do this by changing the tax rules that allow a "step up" in basis on inherited property. This proposal, along with others designed to increase taxes on the wealthy, is included in Biden's recently released American Families Plan – a $1.8 trillion package that includes spending on childcare and education, guaranteed paid family and medical leave, tax breaks for lower- and middle-income Americans, and more.
Currently, if you inherit a capital asset that increased in value when the person who died owned it, the asset's basis is increased to the property's fair market value at the date of the previous owner's death. This adjustment is called a "step up" in basis (or "stepped-up" basis). The increase in basis also means that the person who inherits the property can sell it immediately without paying any capital gains tax, because there is technically no gain at that point to tax.
Here's an example: Susan's father bought some stock 20 years ago for $10,000. When her father dies, Susan inherits the stock – which is now worth $100,000. Susan immediately sells the stock for $100,000. The amount of gain to be taxed is calculated by subtracting the basis (typically the amount paid for the stock) from the amount received for the sale. Without a step up in basis, the gain would be $90,000 ($100,000 - $10,000), and Susan would pay capital gains tax on that amount. However, with the stepped-up basis, there is nothing to tax. That's because Susan's basis in the stock automatically jumps from $10,000 to $100,000, which means the selling price and the basis are identical. If they're the same, then there's no gain to tax ($100,000 - $100,000 = $0).
![https://cdn.mos.cms.futurecdn.net/hwgJ7osrMtUWhk5koeVme7-200-80.png](https://cdn.mos.cms.futurecdn.net/hwgJ7osrMtUWhk5koeVme7-320-80.png)
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Biden's Plan to Eliminate Stepped-Up Basis
While the American Families Plan is light on details, the plan calls for an end to the effects of a stepped-up basis for gains of $1 million or more ($2 million or more for a married couple). According to the White House, "billions in capital income would continue to escape taxation entirely" without this change.
Property donated to charity wouldn't be taxed. Family-owned businesses and farms wouldn't be subject to capital gains tax either if the heirs continued to run the business. The existing capital gain exclusion of up to $250,000 ($500,000 for joint filers) upon the transfer of a primary residence would still apply, too. Other unspecified exceptions could also be added, such as for transfer to a surviving spouse or through certain trusts. (Note: Setting up a trust can take some time, so don't wait too long to start the process if exceptions for transfers through a trust are eventually enacted.)
While not specifically stated, any unrealized gain on capital assets would likely be taxed under the Biden plan when the property owner dies. For instance, in the example above, the $90,000 gain would be subject to tax whether or not Susan sold the stock after her father dies (i.e., the stock would be treated as if it were sold). Otherwise, the gain could continue to go untaxed indefinitely if Susan holds on to the stock, passes it along to her heirs, who hold on to it and pass it along to their heirs, etc., etc., etc. Presumably, if the stock is treated as sold and the gain is taxed when her father dies, Susan's basis in the stock would still be $100,000 to avoid double taxation on the original $90,000 gain if she were to actually sell the stock later.
Increased Capital Gains Tax Rate
Elimination of the step up in basis will be amplified if the president's proposal to raise the top tax rate on long-term capital gains is also enacted. Under the American Families Plan, the highest tax rate on long-term capital gains would shoot up from 20% to 39.6% for people earning $1 million or more for the year. Wealthy Americans wouldn't do any better with short-term gains, either. Short-term gains are taxed at the ordinary income tax rates, but Biden also wants to up the top tax rate on ordinary income to 39.6%.
There's also the 3.8% surtax on net investment income to consider. That tax applies to all sorts of investment income, such as taxable interest, dividends, gains, passive rents, annuities, and royalties. When the NII tax is tacked on, millionaires could be hit with an overall tax rate of 43.4% on their capital gains.
Will the Stepped-Up Basis Changes Pass?
The president faces an uphill battle to change the stepped-up basis rules. He shouldn't expect any Republican support in Congress, and some push back from moderate Democrats is likely as well. In fact, he'll have a tough time getting any of his personal income tax hikes approved as currently proposed. Increasing taxes on individuals is just more difficult than boosting taxes on businesses.
As a result, it's not time to hit the panic button just yet. It will take some time for Congress to sort through the president's plan, draft legislation (probably another "reconciliation bill"), debate, and vote on a final plan. More details (much needed!) about the American Families Plan could come out soon, too. We also don't expect any of the tax changes to be retroactive and apply to the 2021 tax year. And, in the end, the proposed adjustments to the stepped-up basis rules could be thrown out. So, start thinking about your overall estate plan and how the elimination of the step up in basis could impact it, but don't make any rash moves at this point.
Get Kiplinger Today newsletter — free
Profit and prosper with the best of Kiplinger's advice on investing, taxes, retirement, personal finance and much more. Delivered daily. Enter your email in the box and click Sign Me Up.
Rocky Mengle was a Senior Tax Editor for Kiplinger from October 2018 to January 2023 with more than 20 years of experience covering federal and state tax developments. Before coming to Kiplinger, Rocky worked for Wolters Kluwer Tax & Accounting, and Kleinrock Publishing, where he provided breaking news and guidance for CPAs, tax attorneys, and other tax professionals. He has also been quoted as an expert by USA Today, Forbes, U.S. News & World Report, Reuters, Accounting Today, and other media outlets. Rocky holds a law degree from the University of Connecticut and a B.A. in History from Salisbury University.
-
Visa Is the Worst Dow Stock Wednesday. Here's Why
Visa stock is down sharply Wednesday after the credit card company came up short of revenue expectations for its fiscal Q3.
By Joey Solitro Published
-
Another Analyst Moves to the Sidelines on Tesla Stock After Earnings
Tesla stock is spiraling Wednesday after the EV maker's big earnings miss and Wall Street has been quick to weigh in. Here's what you need to know.
By Joey Solitro Published
-
IRS Ends Inherited IRA Confusion: Annual RMDs Required for Many
IRAs The agency has resolved a major point of uncertainty for inherited IRA beneficiaries.
By Kelley R. Taylor Last updated
-
$145 Million in ‘Senior Freeze’ Checks Mailed
Property Tax What you need to know about New Jersey's property tax relief program for older adults.
By Kate Schubel Published
-
TaxAct Class Action Settlement: Details to Know
Tax Filing A multimillion-dollar settlement over alleged data privacy violations affects some TaxAct users.
By Kelley R. Taylor Last updated
-
An IRA Contribution Option You Might Not Know
IRAs Retirement savings might not have to take a back seat just because your partner doesn't earn income.
By Kelley R. Taylor Last updated
-
Project 2025 Tax Overhaul Blueprint: What You Need to Know
Tax Proposals Some people wonder what Project 2025 is and what it suggests for taxes.
By Kelley R. Taylor Last updated
-
The Taxes That Come out of Your Paycheck
Payroll Tax Your take-home pay is often less than expected due to several payroll tax withholdings you need to know.
By Kelley R. Taylor Last updated
-
Seven States Where Gas Tax Increased July 1
Gas Taxes Since July has arrived, drivers in several states are facing a gas tax hike.
By Kelley R. Taylor Last updated
-
401(k) Withdrawal Penalty Rule Changes for 2024
Tax Rules More people are taking early emergency withdrawals from retirement savings accounts. New rules might offer some relief.
By Kelley R. Taylor Last updated