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Maryland Senator Van Hollen‘s Bill to End Step Up in Cost Basis

Maryland Senstor Chris Van Hollen, Democrat, Bernie Sandlers, (I-VT), Sheldon Whitehouse, (D-RI), Cory Booker (D-NJ)and Elizabeth Warren (D-MA) introduced the bill to repeal current step up in cost basis provision at death and when gifting. Their bill was welcomed and supported by numerous lobbyists like the American Federation of Teachers, Network Lobby for Catholic Social Justice and many others.

What does this STEP Bill mean to you?

With this new legislation – eliminating the step up in cost basis would mean that if you purchased or inherited a house, or a farm or a stock for $100,000 and when you died the property was $3,000,000 dollars your beneficiaries will have to pay flat 39.6% capital gain tax on 1,900,000 dollars. Take 3,000,000 – 100,000= 2,900,000 and take a tax credit of $1,000,000 which this bill includes ( the difference between your original cost basis – when you purchased that property and the value of that at death minus the $1,000,000 tax credit). Hence your beneficiary will be forced to either sell the house or a farm or any other property or come up with the money from some other source before inheriting it – if at all.

The long term capital gain tax for this transaction would be flat 39.6%.

This plan currently exists in Canada and Maryland Senator believes that Canadian model of taxation is in the best interest of Maryland state and for the Maryland residents.

Senator Van Hollen’s official site states:

“U.S. Senator Chris Van Hollen (D-Md.), joined by Senators Cory Booker (D-N.J.), Bernie Sanders (I-Vt.), Sheldon Whitehouse (D-R.I.), and Elizabeth Warren (D-Mass.), announced a new proposal to close the stepped-up basis income tax loophole – reforming one of the largest tax breaks in our federal tax code in order to support national investments that will benefit all Americans and build a more inclusive economy. This new proposed legislation, the Sensible Taxation and Equity Promotion (STEP) Act, addresses the stepped-up basis loophole by taxing unrealized capital gains when heirs inherit huge fortunes on which the original owner never paid income taxes”.. See vanhollen.senate.gov

Clearly, the example referenced above makes few factual errors:

1. A property you purchased has been purchased with your after tax dollars. This is not an “income tax loophole” as the proponents of this bill claim. You worked hard, you purchased a house or a condo in prior years either for cash, or on mortgage and that property was paid for with your after tax dollars. To be factually correct, this bill creates double taxation. Your property has been purchased with after tax dollars. Than, each year you are paying property tax to your county. And now, the appreciation of that property needs to be taxed. There is no loophole. The fact that government didn’t impose a tax burden on transfers of the decedent’s property to his children is not a loophole. The loophole is exempting non-profit organizations from equal taxation as any other business organization.

Middle class rarely has enough to create none profit organization, or “Charitable” organization. These tax exempt entities are one of the largest beneficiaries and lobbyists of our members of Congress.

2. Distinguished Senators Van Hollen, Elizabeth Warren and Bernie Sanders confused income tax with long term capital gain tax often alternating the two concepts. Sadly the long term capital gain tax rate is not a “progressive” rate as the income tax rate. Long term capital gain rate is a fixed at 39.6% rate and it doesn’t depend on your income tax bracket.

3. This eliminating Step Up in basis bill follows the property costs basis vs fair market value at the date of death and has nothing to do with the overall Estate Tax.

There are few bills currently in Maryland addressing the issue of the overall Estate Tax in Maryland. This means that if Maryland lowers the limit of Estate tax exemption, the decedent estate will be taxed separately – federal capital gain tax for the elimination of the step up in cost basis which this Bill proposes and then Maryland Estate Tax and Maryland Inheritance Tax which are separate tax and separate issues.

Senator Van Hollen’s explanation to this tax states the following:

“This legislation would close the stepped-up basis loophole by taxing unrealized capital gains when heirs inherit huge fortunes on which the original owner never paid income taxes. The tiny share of estates that owe the estate tax will not be subject to double taxation, because the income taxes paid under this bill will be deductible for estate tax purposes. And the bill includes special rules to ensure that wealthy families are not able to avoid the tax by abusing trusts.
To ensure this change applies only to wealthy families, and to protect small family farms and businesses, the bill would allow all individuals to exclude up to $1 million in unrealized capital gains from this tax. For example, if someone dies holding $6 million in property for which they paid $4 million, they would only pay taxes on $1 million of that $2 million gain. If someone dies holding $3 million in property for which they paid $2 million, none of that $1 million gain would be taxable. On top of that, existing tax laws would provide an additional exclusion of up to $500,000 for personal residences, and assets held in retirement accounts would continue to not be subject to capital gains taxes. Gifts and bequests to charity would be exempt from the tax.
In addition to excluding up to $1 million in gains, the legislation allows taxpayers to pay the tax in installments over a 15 year period for capital gains that apply to any illiquid asset like a farm or business.

This legislation does not pertain to non-profits and foundations so if you wish to transfer the property to your hairs make sure you have your estate plan ready as Van Hollen- Sanders-Warren’s closing the “loophole” for the “wealthiest” is a smokescreen since the wealthiest already have their non-profits ready to receive the property tax-free.

Can Hollen’s plan states: “Gifts and bequests to charity would be exempt from the tax.”

The STEP Act is supported by: AFL-CIO, American Federation of Teachers, Americans for Tax Fairness, Coalition on Human Needs, Institute on Taxation and Economic Policy, American Federation of State, County and Municipal Employees (AFSCME), Patriotic Millionaires, and NETWORK Lobby for Catholic Social Justice.

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