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1 1 (June 4, 2021)

handle is hein.crs/govednp0001 and id is 1 raw text is: Tax Treatment of Capital Gains at Death When an asset is sold that has appreciated in value, such as a share of stock, the gain is taxed at rates of 0%, 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 asset held for at least one year (referred to as long-term capital gains); otherwise, gains are subject to ordinary rates (the top rate is 37%). An additional 3.8% tax applies to capital gains (as well as other passive income) when incomes reach $250,000 for a joint return and $200,000 for a single return. Capital gain subject to tax is 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 asset. 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 capital gains tax is not levied on assets held until death. These assets are included in the estate at market value and subject to estate taxes 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 increase will 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 and Gift Tax Provisions, by Jane G. Gravelle for further discussion of the estate tax. Proposals have been made to change step-up basis, including a Biden budget proposal to tax capital gains transferred at death or by gift. Current Law for Assets Held Until Death: Step-Up 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 that occurred since inheriting the asset. Thus, the gain of the asset in the hands of the decedent would never be subject to income taxes. (Assets transferred by gift retain the original basis of the donor.) Because of this step-up rule, one justification for the estate tax has been as a backstop to the escape from the capital gains tax, although the estate tax is now subject to a historically large exclusion and less effective in performing a backstop rule than in the past. In 2019, 6,409 estates were subject to the estate tax-a decline of nearly 60% since 2010. Updated June 4, 2021 Potential Revisions in the Tax Treatment of Capital Gains at Death Two proposals have been made for changing the tax treatment of capital gains at death: adopting carryover basis and taxing capital gains 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 tax when and if the heir sold the asset. Carryover basis has been proposed 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 took effect. The second instance was in 2010. In the Economic Growth and Tax Relief Reconciliation Act of 2001 (P.L. 107-16), the estate tax was scheduled to be reduced and eliminated entirely in 2010 to be replaced by carryover basis. Although the estate tax was restored, executors in that year could elect to pay the estate tax or choose carryover basis, with a $1.3 million exemption. Estimates from researchers at the Department of the Treasury indicated that 60% of estates opted for the carryover basis. In December 2019, Senators Romney and Bennet proposed carryover basis 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 revenue gain from a carryover basis regime would rise over time as heirs sell assets. In its 2020 Budget Options report, the Congressional Budget Office estimated that adopting carryover basis 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 treatment of capital gains at death is to treat death as a realization event (that is, treated as if the decedent had sold the asset in the last year of life) and tax capital gains at that time. The heirs would increase the basis by the gains (i.e., their basis would be market value at time of death, the same as under present law). The estate value would be reduced by the capital gains tax paid. Proposals to tax capital gains at death date back to President Kennedy in 1963 and were proposed by the Ford and the Obama Administrations. https://crsreports.congress.gov

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