Older couple sitting with estate planning attorney

What is the STEP Act?

Some of President Biden’s plans for the federal estate tax have made the news in the past few months. You may have heard plans for increasing the federal estate tax rate, lowering the federal exemption amount, and more. Have you heard of the STEP Act? Sponsored by Senator Chris Van Hollen, and others, the Sensible Taxation and Equity Promotion (STEP) Act looks to contribute to advancing the President’s agenda in overhauling the federal estate tax laws.

What is the STEP Act?

Are you familiar with the stepped-up basis? Let’s back up and explain. Those who work must pay income tax each year on what they earn. Income earned from wealth accumulation, such as investments, is supposed to be taxed through the capital gains tax, as opposed to income tax. If a person dies with assets that have accumulated value over his or her lifetime, however, taxes are never collected on these capital gains. This is true even if heirs that inherit such assets sell them right after receiving them. This is referred to as the “stepped-up basis” loophole as heirs are allowed to step up the cost basis of the inherited property so that it matches its valuation on the date of the previous owner’s death. The result is that only capital gains will be taxed above and beyond that point.

The Joint Committee on Taxation estimated that the “stepped-up basis” loophole resulted in $41.9 billion in tax breaks for 2021 alone. The STEP Act looks to close the loophole and eliminate the stepped-up basis. To do this, the Act looks to have capital gains taxation imposed on unrealized appreciation of assets when transferred. The transfer could be a gift or made upon death via inheritance. The exception to this, however, would be if the appreciated assets were transferred to a spouse or a charity. In those cases, there would be no capital gains tax imposed. 

It should also be noted that the bill protects against double taxation of the unrealized appreciation of assets left in an estate by making the tax paid pursuant to the STEP Act deductible for purposes of calculating any estate tax liability. The bill also looks to provide protections for those families with farms and small businesses. The Act allows individuals to exclude up to $1 million in unrealized capital gains from taxation. An additional exclusion of up to $500,000 is also provided for personal residences. Those assets held in retirement accounts would also continue to not be subject to the capital gains tax.

Pittsburgh Business Law Attorneys

The STEP Act was proposed on March 29th and, if passed, would be retroactively effective as of January 1st of 2021. If the STEP Act passes, its changes would result in fundamental alterations to estate planning. For guidance on how to plan for the STEP Act and other potential estate tax changes, reach out to the knowledgeable estate planning attorneys at Jones, Gregg, Creehan & Gerace.  Contact us today.