$6,000,000,000,000 – it takes a lot of zeros to get to 6 trillion dollars, an amount that represents more than one-fourth of our economy. The rub, we the tax paying citizens of this fine country will have to pay that back. In last week’s Weekly Market Review we took aim at the increased capital gains taxes that are being proposed. This week, I want to shed light on a different tax law change being considered that will help pay for the proposed $6,000,000,000,000 in spending. The potential elimination of the “step-up in cost basis”. The step-up in cost basis that occurs when someone dies has allowed heirs to pass property, businesses, and investments to loved ones without realizing the capital gain tax. Eliminating the step-up in cost basis could have major ramifications for younger generations, especially those that are part of a family business or family farm.
Example, someone buys a stock, business, or farm for $100,000 and during their lifetime never sells that property. At their death, if the value of that property is $500,000, the $400,000 of increased value isn’t currently subject to capital gains taxes, but if the step- up in cost basis is removed, it would be. This is not an estate tax, but rather a tax on the gain that has occurred since original purchase. Depending on the amount, estate taxes could be in addition to any capital gain taxes.
Small business owners or family farms hoping for the business or farm to pass down to future generations will have some major challenges if large taxes are coming due after death. Older investors who have large gains that have decided to just hold the investment until death so that they and their loved ones can avoid the capital gains taxes may need to plan differently. This ARTICLE from CNBC digs in on the details and planning ramifications if major tax law changes go into effect.
Meanwhile, the stock market charges forward to all-time highs, with most corporations turning in very good to outstanding earnings reports. While we can all guess and debate the stock market being too high or not, it is good to see many businesses are thriving again. Certainly, there are some that continue to struggle, but our rapidly recovering economy makes you question; do we really need more wide-spread stimulus that will require major tax law changes to pay for it?
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As always, we hope you find the Weekly Market Review both interesting and informative. Have a great week!
Trevor N. Coe, CFP®