Lawmakers Prepare For Tax Hikes, Step-Up-In-Basis Rule Remains - Media

Tom Burroughes, Group Editor, September 14, 2021


It has been noticed that the proposed legislation does not include a provision to tax unrealized capital gains on inherited assets, or what is called the step-up-in-basis. This obscure-sounding rule has been used for decades, and eliminating it would have a big impact on tax and estate planning.

Senior Democrat lawmakers have released plans to push back some of the tax cuts enacted under the previous Donald Trump administration, including the idea of raising the top rate of corporation tax to 26.5 per cent from 21 per cent, media reports said. 

The proposals came from the Ways and Means Committee, which sets tax policy. The ideas are being debated this week, as part of a way to pay for the Democrats’ $3.5 trillion public spending plans.

In 2017, Trump cut corporate taxes from 35 per cent. The tax rate was one of the highest in the industrialized world, far above the average for OECD member countries, which was around 22 per cent. Biden earlier this year won agreement from the G20 nations to set a global corporate tax floor of 15 per cent. 

It has been noticed that the legislation does not include a provision to tax unrealized capital gains on inherited assets, or what is called the step-up-in-basis (InvestmentNews, September 13, others). That change had been worrying wealth advisors. The step-up-in-basis rule allows an asset’s value to be reset to the fair market value at the owner’s death, removing any accrued gain for capital-gains tax purposes. The rule has been used for decades, allowing a tax-free transfer of appreciation in assets such as stocks, real estate and family firms. Advisors have told Family Wealth Report that eliminating this rule was a key concern in tax and estate planning. 

One report (Wisconsin State Farmer, September 13) suggested a reason for retaining the step-up-in-basis rule was lawmakers' worries that getting rid of it would hit family-run farms - an important political constituency.

Democrats’ plans for personal taxation would take the top rate back to its pre-2017 level - from 37 per cent to 39.6 per cent. This would apply to taxable income above $400,000 for individuals and $450,000 for married couples. Lawmakers also want to raise capital gains to 25 per cent for those with incomes above $400,000, up from 20 per cent at the moment. An additional 3 per cent surcharge would be imposed on taxable income in excess of $5 million (source: BBC).

There could be a vote on the bill in the House as early as the end of September.

As previously reported, the US Treasury has warned that many high net worth Americans aren’t paying their alleged fair share of tax by the use of complex and opaque avoidance techniques. In response to such a point, some argue that claims that HNW people get away with not paying enough taxes are absurd.

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