4 ms·

It’s called the stepped up basis and yes, only applies to your estate. A married couple who bought a house in Palo Alto for $250k that’s now worth $5.25M and w

It’s called the stepped up basis and yes, only applies to your estate. A married couple who bought a house in Palo Alto for $250k that’s now worth $5.25M and who bought $250k of Apple stock that’s now worth $20.25M would have a Federal tax bill of ~$5 million if they sold those assets and gave the cash to their kids. If however they were hit by a bus on the way to their accountants office, and the kids inherited the assets and sold them the next day, they would owe zero tax. There’s a popular myth that estate taxes are a second tax on income but many assets for the very wealthy are never taxed..

mixmastamyk 2y ago
^^^ This is the real loophole, the rest is a distraction.
PaulDavisThe1st 2y ago
This is because for a long time, the USA does not tax assets other than real estate. Our tax system is structured around the fundamental idea of taxation occuring on transactions, whether that's income in exchange for labor, income resulting from the sale on (non-real-property) assets etc. I'm not sure if this is a good thing (it might be, it might not) but it's the way it is.
- Panzer04 2y ago
  It's mostly practical, I think. Not all assets can be valued, or are liquid. Once a transaction occurs though you have both a price to tax on and the money to pay the tax.
  - mikeyouse 2y ago
    It’s awfully convenient that this ambiguity in asset prices leads to a massive an unprecedented tax break to the richest people in the country — many of whom are literal experts in valuation.
- bruce511 2y ago
  The reverse approach has issues as well, primarily for assets that aren't easily divisible. The obvious example is family farms, or indeed the family house. Capital taxing the asset on death means a (potentially large) tax bill happens in many cases this can't be paid without selling the asset. If the sale was to another family looking for a farm, then that could be argued is neutral. But it won't be. It'll be sold to a mega-corp because they have more money to spend. So in a couple generations you kill off areas that are primarily small farms. This doesn't just apply to property. The family silver collection, the family business, the list goes on. Inheritance tax is tricky. Just passing money down entrenches an aristocratic class. Taxing it though destroys value in all kinds of areas.
  - chgs 2y ago
    > in many cases this can't be paid without selling the asset. Ok. And? Why should someone get $5m for doing bugger all. If they were paid $5m for cleaning a car they would lose a fortune in tax.
    - bruce511 2y ago
      They're not getting 5m, that's the point. They're inheriting an asset which may be valued at 5m. Like a farm, or a house, or a painting or whatever. Forcing the sale of family property or assets does not serve any good in the long term.
      - dataflow 2y ago
        > Forcing the sale of family property or assets does not serve any good in the long term. How is carrying the cost basis forward without stepping it up "forcing a sale"?
        saltcured 2y ago
        It is under a system where ownership transfers are treated as taxable events. The recipient needs to pay the taxes, but cannot afford to without liquidating the inherited asset. I think you just need to propose a set of related rules changes. Replace the inheritance basis step-up with a similarly scoped rule that says this inheritance does not count as a taxable ownership transfer, so taxes are not due at that point. You may also need new rules for estimating the basis when records are lost across multiple inheritance events? The current system is a bit like a tax foregiveness jubilee, but dribbled out to individual families rather than synchronized across the whole economy. It resets things so that regular people can function in this system, without requiring all the family accounting and records keeping of some aristocratic dynasty.

mixmastamyk 2y ago

^^^ This is the real loophole, the rest is a distraction.

PaulDavisThe1st 2y ago

This is because for a long time, the USA does not tax assets other than real estate. Our tax system is structured around the fundamental idea of taxation occuring on transactions, whether that's income in exchange for labor, income resulting from the sale on (non-real-property) assets etc. I'm not sure if this is a good thing (it might be, it might not) but it's the way it is.

Panzer04 2y ago
It's mostly practical, I think. Not all assets can be valued, or are liquid. Once a transaction occurs though you have both a price to tax on and the money to pay the tax.
- mikeyouse 2y ago
  It’s awfully convenient that this ambiguity in asset prices leads to a massive an unprecedented tax break to the richest people in the country — many of whom are literal experts in valuation.
bruce511 2y ago
The reverse approach has issues as well, primarily for assets that aren't easily divisible. The obvious example is family farms, or indeed the family house. Capital taxing the asset on death means a (potentially large) tax bill happens in many cases this can't be paid without selling the asset. If the sale was to another family looking for a farm, then that could be argued is neutral. But it won't be. It'll be sold to a mega-corp because they have more money to spend. So in a couple generations you kill off areas that are primarily small farms. This doesn't just apply to property. The family silver collection, the family business, the list goes on. Inheritance tax is tricky. Just passing money down entrenches an aristocratic class. Taxing it though destroys value in all kinds of areas.
- chgs 2y ago
  > in many cases this can't be paid without selling the asset. Ok. And? Why should someone get $5m for doing bugger all. If they were paid $5m for cleaning a car they would lose a fortune in tax.
  - bruce511 2y ago
    They're not getting 5m, that's the point. They're inheriting an asset which may be valued at 5m. Like a farm, or a house, or a painting or whatever. Forcing the sale of family property or assets does not serve any good in the long term.
    - dataflow 2y ago
      > Forcing the sale of family property or assets does not serve any good in the long term. How is carrying the cost basis forward without stepping it up "forcing a sale"?
      - saltcured 2y ago
        It is under a system where ownership transfers are treated as taxable events. The recipient needs to pay the taxes, but cannot afford to without liquidating the inherited asset. I think you just need to propose a set of related rules changes. Replace the inheritance basis step-up with a similarly scoped rule that says this inheritance does not count as a taxable ownership transfer, so taxes are not due at that point. You may also need new rules for estimating the basis when records are lost across multiple inheritance events? The current system is a bit like a tax foregiveness jubilee, but dribbled out to individual families rather than synchronized across the whole economy. It resets things so that regular people can function in this system, without requiring all the family accounting and records keeping of some aristocratic dynasty.