Proposals to End 'Step-Up in Basis' and Give IRS $80 Billion for Audits Both Target Wealthy

Chris Gaetano
Published Date:
Apr 27, 2021

The White House released dual tax proposals, both of which primarily target the wealthiest Americans, Bloomberg reported.

The stepped-up basis provision in estate tax law has generally allowed heirs to reduce their capital gains losses by resetting the market value of assets to their value on the date of the original owner’s death. Then, when the heir sells these assets, capital gains taxes are applied based on this reset value. This has generally allowed people to save on taxes by willing securities to their heirs instead of cash. President Biden is calling for an end to this provision, which has, in the past, been referred to as a loophole. Such a move would serve to significantly increase the amount of taxes heirs pay on their inheritances, since the capital gains would be calculated based on total gain since the initial purchase.

In addition, President Biden proposed giving the IRS $80 billion in extra funding to audit corporations and wealthier individuals, who generally tend to have a rather low audit rate, even compared to the generally small number of audits that happen every year. The IRS's hesitance to audit wealthier individuals has been an ongoing issue: Since 2012, the number of audits of those with incomes of a million dollars or more has dropped by 72 percent, going from 40,965 audits to 11,331 in 2020. Considering that less than 1 percent of all income tax returns are audited in general, the number of audits of millionaires is likely even lower.

He is also planning to propose a new top individual tax rate of 39.6 percent for those making at least $400,000, up from 37 percent currently.

These proposals are the latest in a series of salvos aimed at the nation's wealthy; most recently, President Biden said he was considering a doubling of the effective capital gains rate for investors who make more than $1 million a year. He also plans to pay for most of his major infrastructure plan through corporate tax increases. This agenda has put him at least partially at odds with members of his own party, especially the New York delegation, who have sworn to oppose any tax legislation that does not remove the $10,000 cap on state and local tax deductions.

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