To understand what a step-up in basis is all about, you need some background information about the capital gains tax.
If you are in possession of an appreciated asset, the gain would be taxable if and when you realize it. The holder of an asset would realize a gain if the asset was liquidated and the appreciation was in hand.
Under the tax code, there are short-term capital gains, and long-term capital gains. A gain would be a short-term capital gain if it was realized less than a year after the asset was purchased. A long-term gain would be a gain that was realized more than a year after the original acquisition,
To encourage long-term investments, the rate on short-term capital gains is higher than the rate on long-term capital gains. The short-term capital gains rate is equal to your regular income tax rate.
Long-term gains are based on your level of income as well, but the parameters are more friendly. In 2014, single filers who earn in excess of $406,750 would pay the top long-term capital gains rate.
This rate is 20 percent at the present time. For a couple, this figure would increase to $457,600. Once again, these are 2014 figures, and they could be adjusted upward in 2015.
People who are in the middle income tax brackets pay a 15 percent long-term capital gains rate. Those who are in the 10 percent bracket or the 15 percent bracket are not required to pay long-term capital gains taxes. They are totally exempt.
Step-Up in Basis
Now that we have provided the necessary background information about the capital gains tax, we can explain the step-up in basis.
If you were to inherit assets that appreciated during the life of the person who passed these resources along to you, you would get a step-up in basis. As the inheritor, you would not be required to pay a tax on the capital gains that accumulated during the life of the decedent.
Because of the step-up in basis, you would get a fresh start. You would only be responsible for gains that took place after you took possession of the assets, and this tax would only be levied if you actually realized the gains.
Estate Tax
You do have to be aware of the federal estate tax if you inherit appreciated assets. If assets appreciated while they were in the possession of the decedent, and there is estate tax exposure, the estate tax would still be applicable.
Schedule a Free Consultation
We can be of assistance if you have questions about how taxation can impact your estate planning efforts. To set up an appointment, send us a brief message through this page: Smithtown NY Estate Planning Attorneys.
Mark S. Eghrari, Estate Planning Attorney
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