How a living trust can help keep your Houston estate private
January 21, 2015
How your Houston estate plan may be impacted by proposed changes to 529 plans
January 23, 2015
In his most recent State of the Union Address, President Obama proposed several tax changes that could impact millions of Americans. One of these proposals was to raise the top tax rate on long-term capital gains and qualifying dividends to 28 percent (which includes the Affordable Care Act’s 3.8 percent investment income surtax on high-income taxpayers). That means an increase in taxes when investors sell property at a profit, such as stocks that have appreciated in gains.
Another significant tax proposal in Mr. Obama’s address concerns the adjustment of basis to assets when a person dies. Under current law, when a person dies, his assets receive a “stepped up basis”, meaning that whoever inherits the assets takes the asset with a basis of the fair market value of the asset on the date the decedent died. For example, if grandma dies and leaves you with a house that she bought for $150,000 and is now worth $200,000, you get a new cost basis in the house of $200,000. That means if you were to sell the house for $200,000, you would pay no capital gains tax because there would be no profit on the sale. However, without the stepped up basis, your basis in the house would be $150,000 and you would owe capital gains tax on the $50,000 profit. Under the new proposal, grandma’s estate would be taxed on the $50,000 profit on her final tax return.
There would be several exceptions under the proposed law. First, no tax would be due until the surviving spouse dies. So if grandpa dies before grandma, no tax would be due until grandma dies. Also, the first $100,000 in capital gains would be exempt ($200,000 for couples). There are also special rules that would help protect small businesses and prevent a family owner from having to sell a small business in order to pay the tax. Additionally, gifts to charities would be exempt.
Wealthy families have relied for years on the stepped up basis in order to avoid capital gains tax on appreciated assets, and if this new proposal becomes law, it would seemingly put an end to that strategy. Some pundits have stated that Mr. Obama may be willing to repeal the estate tax in exchange for this new proposal, given that it is likely that the government can raise much more revenue under this proposal than under the current estate tax regime. Time will tell if this proposal will make its way through Congress and become law, so we’ll have to stay tuned to see how this shakes out.
Reference: Forbes (January 18, 2015) “President Obama Targets the ‘Angel of Death’ Capital Gains Tax Loophole”
