While death and taxes are the only guarantees in life, most people won’t deal with death taxes. You have to have or give away enough assets to owe gift or estate taxes. Like other taxpayers, California taxpayers use “step-up in basis” to lower their tax obligations. “Step-up in basis” allows people to avoid or cut capital gains taxes on inherited assets. Changes to “step-up in basis” will increase the number of people who deal with gift or estate taxes.
How does “step-up in basis” lower taxes?
The step-up tax break gives inherited assets such as a house or stock a new value after the owner’s death. A family that doesn’t owe an estate tax can enjoy a “step-up in basis.” A relative who buys a stock at $5,000 and sells the stock at $350,000 owes a tax on the $345,000 gain. If your relative gifts you the asset, you’d owe the $345,000 tax gain. If the relative dies and leaves the stock to you, you’d never have to pay taxes on the profits in their lifetime. Whatever the stock is worth the day the relative dies is the new basis for tax purposes. Certain inheritances, such as retirement accounts, don’t qualify.
Who pays gift and estate taxes?
In 2021, an estate had to be worth more than $11.7 million for federal estate taxes to trigger, which is under 0.1% of deaths in the US. It’s rare for people to pay gift taxes because the exclusion limit is $15,000 to an unlimited number of people. Even people who have to file a gift tax don’t pay unless their total lifetime gifts are above $11.7 million. The high estate tax limits will be lower after 2025. By 2026, the gift exceptions will be $5 million to an unlimited number of people, and the estate tax exemption will be $3.5 million per person. California doesn’t have a lower limit or state levy for estate taxes.
The government has thought about eliminating the “step-up in basis” before as a way to gain more taxes. Congress doesn’t have legislation, but it’s good for people to prepare for change by keeping detailed records. People should track the basis of what they paid for all assets. During estate planning, people should track shares of stocks to costs of home improvements.
