Sunday, June 13, 2004

Untaxed Income

Since Jesse and Matt are discussing the estate tax, let's remember one of the reasons we have an estate tax - to simplify things for the heirs.

When someone dies, there is no need to pay capital gains taxes on the estate's assets. This makes sense, as doing so would be a huge burden for the heirs - not financial, but accounting.

Removing the estate tax will mean that there are huge capital gains that may never be taxed. Ever.


...correction (more to what I posted in comments than from the post itself). Repeal of the estate tax does indeed allow inherited wealth to accumulate until the end of time without having to pay capital gains taxes, however it does not as I said mean that capital gains taxes would not have to be paid on assets once sold.

In current law, asset values for capital gains purposes are calculated on a "stepped-up" basis, meaning that if you receive part of an estate you are liable for any capital gains upon sale of those assets, with the base value calculated at the time of the inheritance. This does indeed mean that a large chunk of the capital gain is never taxed. So, if you receive a stock portfolio and instantly cash it in no capital gains tax would be paid, but if you wait a year and sell it you'd be liable for the capital gain starting from the moment you received it. Of course, if you just pass it on to your heirs without sale they too can essentially nullify the capital gains liability.

The estate tax repeal, interestingly, actually limits the amount of assets which can be passed on with this "stepped-up" system. So, heirs of large estates will indeed find themselves being liable for capital gains based on the original purchase price, and not the price at date of inheritance. I'm just guessing here, but I bet this little provision was thrown in to make the tax cut seem cheaper, and will be chucked out as soon as they extend the full estate tax repeal, which as it stands only lasts one year.