By Joy Taylor – Kiplinger Personal Finance
The President has proposed a new taxing regime that would make death an income tax realization event for wealthy decedents
President Biden has lots of tax proposals. They are dead on arrival in an election year. However, taxes will be a top issue in 2025.
Biden is starting to lay the groundwork ahead of a looming fight on the fate of the tax changes in former President Trump’s 2017 tax reform law, many of which will expire at the end of next year. We’ll look at one of Biden’s thorniest ideas.
Currently, a decedent’s unrealized gains aren’t hit with income tax at death, and heirs get a step-up in basis in inherited assets equal to fair market value. Biden wants to end the effects of the stepped-up basis for wealthy individuals. His proposal generally doesn’t adopt carryover basis, by which the heir would take the same federal tax basis in the inherited assets as the decedent.
It would instead treat death as a realization event for income tax purposes — essentially a deemed taxable sale of the decedent’s capital assets at fair market value, with capital gains and losses reported on the decedent’s final income tax return. The heirs would continue to get a fair-market-value basis in assets they receive. Gifts would also be treated as a realization event for income tax purposes.
Unlike the current law, the donees would take a fair market value in gifted property. There is a $5 million lifetime gain exclusion. Plus other exceptions:
- Property left to a surviving spouse wouldn’t be taxed until that spouse’s death, but the spouse would take a carryover basis in those assets.
- Charitable donations would be exempt.
- Family-owned businesses would escape tax if the heirs run them.
- The existing gain exclusion of $250,000 (or $500,000) on sales of primary residences would continue to apply.