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1 1 (April 21, 2021)

handle is hein.crs/goveday0001 and id is 1 raw text is: Tax Treatment of Capital Gains at Death April 21, 2021 When an assetis sold that has appreciatedin value, such as a share of stock, the gain is taxed at rates of0%, 15%, or 20%, with the top rate applying in 2021 when incomes exceed $501,600 for a joint return and $445,850 for a single return. These income levels are adjusted for inflation. The rates apply to an as set held for at least one year (referred to as long-termcapitalgains); otherwise, gains are subject to ordinary rates (the top rate is 37%). An additional 3.8% tax applies to capitalgains (as well as other passive income) when incomes reach $250,000 for a joint return and $200,000 for a single return. Capital gain subjectto taxis the difference between the sales price and the basis of the asset. For most assets (such as stocks), the basis is the price paid for the as set. In the case of depreciable assets, the basis is lower than the acquisition cost due to depreciation. The part of the gain attributable to depreciation taken is taxed at ordinary rates. See CRS Report 96-769, Capital Gains Taxes:An Overview,by Jane G. Gravelle for further discussion. Currently, the capitalgains taxis not levied on assets held until death. These as sets are included in the es tate at market value and subject to estatetaxes of 35% after a significant exemption (by historical standards) of $11.7 million, as well as other exclusions. (The exemption was doubled in 2017 legislation, P.L. 115-97, and that increasewill expire after 2025 unless the law is changed.) The basis for these assets is the market value at death, referred to as a step-up in basis. See CRS Report R42959, Recent Changes in the Estate andGift Tax Provisions, by Jane G. Gravelle for further discussion of the estate tax. Proposals have been made to change step-up basis, including a proposalby then-presidential candidate Joe Biden to raise the rate on long-termcapitalgains and to change the taxtreatment of capitalgains at death, without specific details. Current Law for Assets Held Until Death: StepUp Basis Under current rules, when an asset is transferred at death, the basis is stepped up to the market value at the time of death. If the heir sells the asset, the gain subject to tax would be the appreciation thatoccurred since inheriting the asset. Thus, the gain of the asset in the hands of the decedent would never be subject to income taxes. (Assets transferredby gift retain the originalbasis of the donor.) Because of this step-up rule, one justificationfor the estate taxhas been as abackstop to the escapefromthe capital gains tax, although theestate taxis now subject to a historically large exclusion and less effectivein performing a backstop rule than in the past. In 2019, 6,409 estates were subject to the estatetax-a decline ofnearly 60% since 2010. Potential Revisions in the Tax Treatment of Capital Gains at Death Two proposals have been made for changing the tax treatment of capitalgains at death: adopting carryoverbasis and taxing capitalgains at death. Carryover Basis Under carryover basis, an asset inherited at death would retain the basis in the hands of the decedent. In this case, the gain would not escape taxation but would be subject to taxwhen and if the heir sold the asset. Carryover basis has beenproposed as far back as 1942 and in two instances has been enacted into law. The first instance was in 1976, although the law was retroactively repealed in 1980 and never tookeffect. The second instance was in 2010. In the Economic Growth and TaxRelief Reconciliation Actof2001 (P.L. 107-16), the estate taxwas scheduled to be reduced and eliminated entirely in 2010 to be replaced by carryoverbasis. Although the estate taxwas restored, executors in thatyear could electto pay the estate taxor choose carryoverbasis, with a $1.3 million exemption. Estimates fromresearchers at the Department of the Treasury indicated that 60% of estates opted for the carryoverbasis. In December 2019, Senators Romney and Bennet proposed carryoverbasis with an exemption of $1.6 million for singles and$3.7 million for married couples, although this plan was never introduced as legislation. The revenuegain froma carryoverbasis regime would rise over time as heirs sell assets. In its 2020 Budget Options report, the CongressionalBudgetOffice estimated that adopting carryoverbasis beginning in 2021 would raise revenue by $110 billion from FY2021 to FY2030, rising from $1.2 billion in FY2021 and $4.8 billion in FY2022 (the first full year) to $18.4 billion in FY2030. Taxation of Capital Gains at Death Another alternative for the treatmentof capitalgains at death is to treat death as a realization event (thatis, treated as if the decedent had sold the asset in the last year of life) and taxcapital gains at that time. The heirs wouldincrease the basis by the gains (i.e., theirbasis would be market value at time of death, the s ame as under present law). The estate value would be reduced by the capital gains taxpaid. Proposals to taxcapitalgains at deathdatebackto President Kennedy in 1963 and were proposed by the Ford and the Obama Administrations. https ://ctsrepurts~conigre&

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