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Estate Taxes: Read the Fine Print

[/fusion_text][fusion_text]The great debate on tax reform is heating up. I’m in favor of simplifying the tax code and think there’s plenty of room for improvement. Here’s one thing that might surprise you, though. I think we should keep federal estate taxes. There is a very good reason for this. With federal estate taxes comes a great benefit called a “step-up in basis.”  I’m afraid that any move to get rid of the estate tax would also repeal a stepped up basis. When the federal estate tax lapsed in 2010 (for one year only), there was no step-up in basis.

Here’s how a step up in basis works. Let’s say your dad bought Google stock at $50 in 2004. With a good week, Google could hit $1,000 this year. If your dad wants to sell the stock, he would pay taxes on the $950 gain. That’s only fair.

However, if your dad is holding the stock when he dies, all of the gain disappears. The cost basis gets “stepped up” to whatever the price was on the date of death. Whoever inherited your dad’s portfolio (hopefully you) gets that money with substantially less taxes due. This is a nice side benefit that accompanies estate taxes. It wouldn’t be fair to tax the gains and the overall wealth.

So back to estate taxes, it’s important to understand how one change affects another. However you feel about estate/death taxes, you should know that they tend to go hand-in-hand with a step up in basis. If you are a couple with an estate less than $11 million, you are likely not affected by estate taxes. If you have a brokerage account, you do likely benefit from a stepped-up basis.

Now of course we can’t all just lobby for our own benefits in the tax code. That’s how we got a code that’s so complicated in the first place. If people decide that it’s in everyone’s interest to keep things simple and get rid of an estate tax and a step-up in basis, I can live with that. I just want to make sure we all know how it affects us.[/fusion_text][separator style_type=”single” top_margin=”” bottom_margin=”” sep_color=”” icon=”” width=”” class=”” id=””][fusion_text]

Legal Disclaimer: These posts do not constitute an offer or recommendation to buy or sell any securities or instruments or to participate in any particular investment or trading strategy. They are for informational purposes only. ASA gathers its data from sources it considers reliable. However, ASA makes no express or implied warranties regarding the accuracy of this information or any opinions expressed by the author and may update or change them without prior notification.