For Immediate ReleaseMarch 29, 2021 Contact: Francesca Amodeo (Van Hollen) Van Hollen Leads Colleagues in Announcing New Legislation to Close the Stepped-Up Basis Loophole Proposal will tackle one of the biggest loopholes in the U.S. tax code, which subsidizes America’s wealthiest heirs WASHINGTON – Today, 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. “To build an economy that works for all Americans we must tackle the inequality in our tax system. The stepped-up basis loophole is one of the biggest tax breaks on the books, providing an unfair advantage to the wealthy heirs every year. This proposal will eliminate that loophole once and for all. It’s time to stop subsidizing massive inheritances for the rich and start investing in everyday Americans,” said Senator Van Hollen. “It is absurd that our tax code allows many of our country’s wealthiest people to get away with never paying a cent in taxes on millions or even billions in capital gains income, while working people pay taxes on every check they receive,” said Senator Sanders. “It is not a radical idea to demand the wealthiest among us pay their fair share and that we put an end to a rigged tax code that disproportionately burdens working people. I am proud to join with Sen. Van Hollen as an original cosponsor of legislation that would close one of the most egregious tax loopholes in our code today.” “As wealth inequality worsens, and American democracy degrades, it's time to take a hard look at devices like ‘stepped-up basis’ that are unique to inherited estates,” said Senator Whitehouse. "The wealthy have rigged our tax system and helped perpetuate massive inequities in our economy and society," said Senator Warren. "Closing the stepped-up basis loophole on huge, inherited fortunes for the wealthiest Americans is one step in the right direction: getting the wealthy and well-connected to pay their fair share." “Generations of the US tax code subsidizing the richest households have entrenched an extraordinary wealth gap, especially by race,” said Senator Cory Booker. “Closing this huge tax loophole for the richest Americans will help reduce extreme wealth inequality in our country, particularly if its savings are used to advance ideas that further level the playing field – ideas like my baby bonds proposal to create and fund a savings account for every child born in the United States that can be used at age 18 to pay for wealth-building investments like higher education, buying a house, or starting a small business.” A. one-pager on the legislation can be found here. The section-by-section explanation can be found here. The discussion draft can be found here. 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. Background Working Americans pay taxes every year on their income. But the income tax is more optional for the wealthiest families, whose income often comes from inherited wealth rather than work. Income from wealth accumulation is supposed to be taxed as capital gains when someone sells an asset for more than what they paid for it. However, when someone dies with assets that increased in value during their lifetime, income taxes are never collected on these capital gains – even if their heirs sell the asset the next day. This is called the “stepped-up basis” loophole, because it allows heirs to step up their cost basis in inherited property to match the value on the date of the previous owner’s death, meaning that only capital gains above that point could ever be subject to income taxes. This is one of the largest tax breaks in the entire federal tax code, with the Joint Committee on Taxation estimating that it is worth $41.9 billion in 2021 alone. Every dollar of the tax break from tax-free stepped-up basis is a government subsidy for inherited wealth, and the bulk of that subsidy goes to the wealthiest family dynasties. Thanks to stepped-up basis, 55% of the wealth in estates worth more than $100 million has never been, and will never be, subject to any income taxes. The STEP Act closes the stepped-up basis loophole by taxing unrealized capital gains when heirs inherit huge fortunes on which the original owner never paid income taxes. Under this proposed legislation, 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. The bill also includes special rules to ensure that wealthy families are not able to avoid the tax by abusing trusts. Lastly, the bill ensures that this change would only apply to the wealthiest of families, and protects small family farms and businesses, in part by exempting up to $1 million in unrealized capital gains from taxation under the bill. The Senators welcome feedback on this discussion draft, particularly for the technical questions raised in the section-by-section explanation, and look forward to introducing this legislation formally in the coming months. “America’s ultra-wealthy are taking advantage of a huge tax loophole today that the STEP Act will close. Unlike most of us who must pay tax on our wages when we earn them, the rich pay no tax as their vast property holdings skyrocket in value. When they die, those untaxed gains, sometimes worth billions of dollars, escape tax forever. The STEP Act will close this loophole and raise huge sums needed to help rebuild roads and bridges, improve schools, and combat climate change,” said Frank Clemente, Executive Director of Americans for Tax Fairness. “The Biden Administration rightly wants to increase taxation on capital gains, the main form of income of the super rich. To do so successfully, it is crucial to close the major loophole: capital gains bequeathed to heirs escape taxation entirely. This proposal eliminates this loophole and ensures that wealthy inheritors pay their fair share,” said Emmanuel Saez, Professor of Economics at the University of California Berkeley. “This proposal is another big step forward towards addressing one of the most inefficient and inequitable tax breaks on income generated by extraordinary fortunes. It would ensure that income produced by extraordinary wealth – large amounts of which currently escape any income tax whatsoever – is subject to income tax on capital gains. And the proposal suggests sound solutions to the detailed technical decisions needed to implement this policy well,” said Chye-Ching Huang, Executive Director of the Tax Law Center at NYU Law. "I could be called the poster-child for the stepped-up basis. The Disney stocks I own have dramatically increased in value, but if I were to pass them on to my kids without selling them? No one would ever pay taxes on that. That wealth doesn't disappear, so I don't know why the responsibility to pay taxes on it should,” said Abigail Disney, member of the Patriotic Millionaires. “Senator Van Hollen’s legislation closes what is perhaps the biggest loophole in the entire tax code – the provision letting the ultra-wealthy transfer to their heirs an unlimited amount of wealth that literally has never been and never will be subject to income tax. It’s a big reason why the tax code is so skewed in favor of the very wealthy. President Biden has repeatedly emphasized how critical closing this loophole is to ending the tax code’s favoritism of wealth over work. This is the year for Congress to act,” said Alexandra Thornton, Senior Director of Tax Policy, Center for American Progress. "In his encyclical Fratelli Tutti, Pope Francis challenges all people to live in solidarity: '[This] means much more than engaging in sporadic acts of generosity. It means thinking and acting in terms of community.’ The Sensible Taxation and Equity Promotion Act requires that the few wealthiest Americans whose income comes from their wealth, not work, pay their fair share of taxes for the sake of the community. NETWORK Lobby is proud to support this bill to fuel investment in our economy, address the racial wealth gap, and move our nation towards actual solidarity," said Sister Simone Campbell, SSS, Executive Director of NETWORK Lobby for Catholic Social Justice. “The Coalition on Human Needs strongly supports the Sensible Taxation and Equity Promotion (STEP) Act. It will lead to a more progressive tax system by generating revenue from our country’s wealthiest individuals to help provide resources to fund human needs programs critical for those families who need them the most,” said Deborah Weinstein, Executive Director of the Coalition on Human Needs. “This is an important bill. It sensibly addresses the most indefensible, glaring omission from the individual income tax base. It will enhance equity and economic efficiency and raise significant revenue from those with a demonstrated ability to pay,” said Harry L. Gutman, Former Chief of Staff of the Joint Committee on Taxation.###         Sensible Taxation and Equity Promotion (STEP) Act Senators Chris Van Hollen, Cory Booker, Bernie Sanders, Sheldon Whitehouse, and Elizabeth Warren Problem: Tax-free stepped-up basis Working Americans pay taxes every year on their income. But the income tax is more optional for the wealthiest families, whose income often comes from their wealth rather than their work. Income from wealth accumulation is supposed to be taxed as capital gains when someone sells an asset for more than what they paid for it. However, when someone dies with assets that increased in value during their lifetime, income taxes are never collected on these capital gains – even if their heirs sell the asset the next day. This is called the “stepped-up basis” loophole, because it allows heirs to step up their cost basis in inherited property to match the value on the date of the previous owner’s death, meaning that only capital gains above that point could ever be subject to income taxes. This is one of the largest tax breaks in the entire federal tax code, with the Joint Committee on Taxation estimating that it is worth $41.9 billion in 2021 alone. Every dollar of the tax break from tax-free stepped-up basis is a government subsidy for inherited wealth, and the bulk of that subsidy goes to the wealthiest family dynasties. Thanks to stepped-up basis, 55% of the wealth in estates worth more than $100 million has never been, and will never be, subject to any income taxes. Solution: The STEP Act 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. 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. Section by Section Explanation of the Sensible Taxation and Equity Promotion (STEP) ActDISCUSSION DRAFTSenators Chris Van Hollen, Cory Booker, Bernie Sanders, Sheldon Whitehouse, and Elizabeth Warren Section 1. Short Title. Section 2. Realization of Gains at Time of Gift or Death In general, property is treated as sold for its fair market value when transferred by gift, bequest, or to a non-grantor trust. o  REQUEST FOR FEEDBACK: With the exception of Intentionally Defective Grantor Trusts, as described below, the legislation uses income tax rules to define transfers subject to deemed realization. As an alternative, should the rules for estate and gift taxes be used to define when a transfer has taken place? The bill includes special rules for trusts: o. Property is not treated as sold when assets are transferred between grantors and their grantor trusts, which are trusts in which current tax law treats the assets as belonging to the owner for income tax purposes. o. Property in grantor trusts is treated as sold when transferred to another person, the grantor dies, or the grantor is no longer treated as the owner. o. Property transferred to or held by grantor trusts is also treated as sold if it would no longer be included in the owner’s estate for estate tax purposes. This prevents the use of Intentionally Defective Grantor Trusts to defer realization on gifts under this bill. o. To prevent permanent avoidance of capital gains taxes using trusts, property held by a non-grantor trust is treated as sold for its fair market value every 21 years after establishment of the trust. As a transition rule, trusts established in 2005 or earlier will have their first deemed realization in 2026. REQUEST FOR FEEDBACK: As an alternative to the 21-year rule, should deemed realization instead occur when a trust makes a distribution to a skip person or when there are no longer any non-skip persons who are trust beneficiaries, based on the rules for the Generation Skipping Transfer Tax (regardless of whether the trust is exempt from the GST)? Exceptions are included for tangible personal property (other than collectibles); for transfers to spouses and charities; and for charitable trusts, qualified disability trusts, and cemetery trusts. p. The spousal exemption applies only to transfers to spouses who are U.S. citizens and long-term residents, who are subject to the existing deemed realization rules in Sec. 877A of the Internal Revenue Code if they subsequently expatriate. o. REQUEST FOR FEEDBACK: Should the exception for transfers to spouses be elective in the case of a decedent? Sec. 267 of the Internal Revenue Code disallows losses with respect to transfers to related parties. The legislation applies this rule when assets are transferred by gift, but not at death. Eliminates carryover basis for gifts, except for spouses and charities. Since built-in gains would be taxed at the time of gift or bequest, the transferee’s basis in the property is stepped-up to match the value that was taxed at the time of transfer.  o. REQUEST FOR FEEDBACK: What estate tax valuation rules, if any, should apply to the income tax imposed on the transferor under this bill and the basis of the property in the hands of the recipient? Requires large trusts to report their balance sheet, income statement, trustees, grantors, and beneficiaries to the IRS. Foreign trusts with U.S. owners already have to report this information. Retirement accounts are not subject to capital gains taxes, and therefore would not be affected by the bill. The exclusion for sales of a principal residence of $250,000 ($500,000 if married) would apply to property treated as sold under the bill. Like other income taxes, capital gains tax liability incurred as a result of the bill would be deducible from the decedent’s gross estate for estate tax purposes. Section 3. Exclusion of Certain Amounts of Realized Gain Provides individuals with a $1,000,000 exclusion from taxation under this bill for unrealized gains at death. Individuals may draw down up to $100,000 of their $1,000,000 exclusion for gifts made during their lifetime, with any remaining amount available at death. This exclusion is adjusted for inflation. o. REQUEST FOR FEEDBACK: Should this exclusion be set at a different level, or structured in a different manner? Section 4. Deduction for Costs of Appraisal of Appreciated Assets Provides itemized deduction for appraisal costs on any asset that is deemed to be sold due to gift or death. Section 5. Extension of Time for Payment of Tax The tax on gains for assets, other than actively traded assets, that are deemed to be sold under this bill may be paid over a 15-year period. This option is only available for realizations at death or under the 21-year rule for non-grantor trusts. Under this option, the decedent’s estate or the non-grantor trust could pay only interest for up to 5 years, and then pay the tax and the interest in up to 10 annual installments. The interest rate reduced to be 45% of the usual rate in the tax code. The person filing the decedent’s final tax return, or the trustee in the case of a non-grantor trust, would make this election. If the asset is liquidated, the full unpaid tax attributable to that asset is due immediately. Sec. 6165 of the Internal Revenue Code allows the IRS to require taxpayers to furnish a bond when an extension is granted to pay a tax, including the extension provided in this Section. Section 5(b) of this bill allows the IRS, the person filing the decedent’s final tax return, and the heirs to agree to an IRS lien on assets as an alternative to furnishing a bond. A trustee could reach a similar agreement with the IRS in the case of a non-grantor trust. The parameters are similar to those in Sec. 6166 of the Internal Revenue Code for installment payment of estate taxes. Section 6. Waiver of Penalty for Underpayment of Estimated Tax  Since taxation of unrealized gains at death is not a predictable event, underpayment penalties are not assessed for taxes due for this reason. Section 7. Effective Date The bill applies to transfers occurring after December 31, 2020; and in taxable years beginning after that date. This means the bill takes effect in 2021 for calendar year taxpayers. Section 8. Severability. If any part of the bill is held to be unconstitutional, the remaining parts of the bill shall not be affected by that ruling.   Please submit comments to: step_act@vanhollen.senate.gov.

Senators Announce Bill to End Stepped-Up Basis

Senators Announce Bill to End Stepped-Up Basis

U.S. Senate

The Sensible Taxation and Equity Promotion Act of 2021 would reduce income inequality by ending the “stepped-up basis loophole” and taxing unrealized capital gains upon death, according to a March 29 release from five Democratic senators.

The Sensible Taxation and Equity Promotion Act of 2021 would reduce income inequality by ending the “stepped-up basis loophole” and taxing unrealized capital gains upon death, according to a March 29 release from five Democratic senators.

The <a href="/lr/resolve//4c5sc">Sensible Taxation and Equity Promotion Act of 2021</a> would reduce income inequality by ending the “stepped-up basis loophole” and taxing unrealized capital gains on death, according to a March 29 release from five Democratic senators.

The Sensible Taxation and Equity Promotion Act of 2021 would reduce income inequality by ending the “stepped-up basis loophole” and taxing unrealized capital gains on death, according to a March 29 release from five Democratic senators.