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No. of Recommendations: 15
STEP Act: Replacing stepped up basis

https://www.cnbc.com/2021/03/30/senate-dems-propose-capital-...

Democrats Step Tax proposal for estates replacing current stepped up basis on inherited investments and real estate. $1MM exemption plus existing up to $500K exemption (married) on your home. Tax paid deducted from Federal Estate Tax. 401k and IRAs exempted. After the exemption your estate will pay capital gains taxes on gain in your investment gains. Part of Biden's tax package. First proposal now in print.

Proposal from Sens. Elizabeth Warren, Mass.; Chris Van Hollen, Md.; Cory Booker, N.J..; Sheldon Whitehouse, R.I.; and Bernie Sanders, I-Vt.

Capital gains over $1MM taxed at 39.6%.

Gifts and bequests to charity exempt.

Capital gains on illiquid assets like farms or businesses could be paid in installments over 15 years.

Strange that these ideas originate in the Senate. I thought tax bills are supposed to originate in the House. But I guess the Senators have better access to the news media.

First details of the infrastructure bill are to be revealed at Pittsburgh tomorrow (Wed, Mar 31).

We shall see how these proposals do in Congress. This is part of paying for Biden's infrastructure plans.

Federal Estate Tax not discussed in this one but current $11+MM exemption expected to be reduced to $3.5MM.
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Timely. Thanks for posting.

We are waiting to hear if we won the bid for an investment property. Since they changed the acceptance time for our bid, we can back out easily. One reason why we like rental properties is the step up in basis on death. Perhaps that single family home will continue to be a single family home instead of a triplex.

Wonder if lack of affordable housing is the result the Dems are looking for? It's way easier to sell the number of shares you need to raise cash than a $500K property.

IP
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No. of Recommendations: 1
Sounds like a reasonable proposal to me. A lot of folks on this board are complaining I should be paying more taxes. <lol>

And no tele, it's not "wealth envy".

intercst
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No. of Recommendations: 16
Strange that these ideas originate in the Senate. I thought tax bills are supposed to originate in the House. But I guess the Senators have better access to the news media.
==================================
That is a constitutional requirement. But creative minds don't let a 240-year-old document get in their way. Seriously, what the constitution does not allow is for the Senate to PASS a revenue or appropriation bill FIRST. Senators can still introduce a tax or budget bill, work on it in committee, and do everything except pass it and send it over to the House.

Back in the olden days of the 1970s and 1980s, tax bills got passed almost every year, and they were fairly bipartisan projects. Tax laws were considered kind of boring, and didn't get much publicity. The House Ways & Means Committee and the Senate Finance Committee would be working on tax proposals simultaneously, and their respective staffs would be comparing notes all the way along.

But even if there were big differences between the two houses' tax bills, here's what they did:
The Senate would have to wait until the House passed their bill first - call it HR 123. And then when that bill arrived in the Senate, they would adopt Senate Amendment No. 1, which read: "Delete all language after the title, and insert in place thereof the text of Senate Bill SB 666." So now the bill before the Senate was the amended (or "Senate version") of HR 123. And when they pass that, with additional amendments, it goes back to the House for final approval, and if that doesn't happen, then it goes to a conference committee.

Even the historic overhaul of the Internal Revenue Code in 1986 got done that way without any real political warfare, with a Democratic House and a Republican Senate. Dan Rostenkowski was the chairman of Ways & Means and Bob Packwood was chairman of Senate Finance. And Washington was a kinder, gentler place to do business.

Bill
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Strange that these ideas originate in the Senate. I thought tax bills are supposed to originate in the House. But I guess the Senators have better access to the news media.
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I should add, another way that senators get around that constitutional sticking point is to take their Senate Bill 666, and add its provisions, as an amendment, to a House appropriation bill that absolutely has to pass - like the Post Office subsidy or defense appropriation bills. The House then either has to swallow it, or it goes to a conference committee. But those are seasonal opportunities also.

Bill
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No. of Recommendations: 2
"Capital gains over $1MM taxed at 39.6%."

I wonder how that plays out?

A $1M estate with $200,000 in capital gains would not be a trigger event since the capital gains are only $200,000?

A $5M estate with $1M in capital gains would be at the threshold?

If that is how it plays out, the stepped up cost basis would apply only to fairly large estates, and only to the extent that the capital gains exceed $1M, not the total value of the estate.

In my case, I have taken profits and offsetting losses episodically through the years in my taxable account so that the capital gains are a fraction of that account.

My sheltered account is more problematic to the extent that those gains have not been harvested.

But if I know in advance that that will be the law when I die (hopefully decades hence), I can harvest capital gains at capital gains rates between now and then, and potentially build an estate well above $1M but with capital gains well below that.

If so, the law would apply only to a small number of wealthy people and only to the extent that the capital gains exceed $1M.
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No. of Recommendations: 2
Strange that these ideas originate in the Senate. I thought tax bills are supposed to originate in the House.

If you haven't already figured it out, Washington D.C. doesn't pay much attention to that dusty old document. Lip service at most.
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I would think that idea could arise anywhere, regardless of where the eventual bill would first come to a vote.
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The real problem is determining the original basis. IF the deceased hasn't kept good records then how do you determine the original cost and the resulting gain.
For some estates would be easy but for others a nightmare.
jmho
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The real problem is determining the original basis.

I used to believe that determining cost basis of older assets would be a problem. However, after working on divorces, assisting with distributing several estates, watching business partnerships dissolve, in addition to the proliferation of computers in the last few decades; I've concluded, with motivation, determining the value of pretty much anything in the last 100 years is doable. The little which can't be, a WAG will suffice.
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No. of Recommendations: 3
The $1MM threshold would be the total of all unrealized capital gains, excluding principal residence which would exempt the first $500,000 of gain. Any unrealized gain in excess of this would be added to the other unrealized capital gains.

First glance suggests this is going to affect primarily the wealthy with large accumulations of illiquid assets, such as business interests, private equity and investment real estate. To get a rough idea of the amount at risk to this new 'Estate Tax' (which is what it is), I took a quick look at the 2016 (most recent) IRS Statistics of Income/Estate Tax Data Tables which for estates valued at $5.45MM and greater, a total gross estate value of $197.1B. Subtract the $10.6B of principal residence shown = $186.4B. Let's assume 50% of this is unrealized gain = $93.2B. Tax this at 39.6% = $36.9B, and this is before any credit for estate tax paid. Of course, there may be quite a bit of unrealized gains in estates between $1MM to $1.5MM (to allow for personal residences) and $5.4MM threshold in the SOI. But from this, it just doesn't look like the uber wealthy are going to be contributing very much to the proposed $3T infrastructure spending this new tax is supposed to pay for, particularly with the ability of this high-net worth group to move assets elsewhere. I mean, where wealth resides, strategies hide, and I can't imagine the uber wealthy with such appreciated illiquid assets are going to just shrug their shoulders and quip sa-la-vie. Nope, strategies will emerge to work around this new step-up tax. The Estate Planning industry will re-emerge and you can bet all manner of tax avoidance strategies, replete with complex gift trusts, fair-value reduction-adjustment strategies, life insurance products, off-shore investments and angles no one has yet thought of will emerge in-force with the single objective of increasing asset basis and decreasing fair value at death.

And a little more thought shows this is also going to affect middle class America.

Example: we own a house in town and one on the Oregon coast. We bought these decades ago when they were affordable (to us), but both are currently valued well into the 6-figures. I don't know how to find data on how many are like us, but it will likely be in the millions of persons. And that's just real estate...add to this highly appreciated taxable accounts and you've got the middle class. For us, at least as I understand the STEP Act, were it in place today and we died, our kids would inherit, after exemptions an unrealized capital gain tax this year of about $235,000.

For those sitting on highly appreciated stocks who hold them for income in taxable accounts who have held the shares for decades, as we have, can strategize realizing the gains over time by periodically selling and then immediately repurchase sufficient shares to gradually bring down the unrealized gains total while keeping in the 15% bracket and avoiding such things as IRMAA and the NIIT surtax.

And then there's going to be the issue of finding basis on property purchased and small businesses started decades ago.

BruceM
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No. of Recommendations: 1
And a little more thought shows this is also going to affect middle class America.

Exactly! If you employ the TMF "buy and hold" investment philosophy, it doesn't take that much investment wealth to have over $1MM in unrealized capital gains. My estimate is having between $2.5MM and $3MM held in taxable investment accounts pretty much guarantees that you will have more than $1MM in unrealized capital gains.

While the proposed STEP Act appears to be a way to redistribute wealth from the "filthy rich" to the poorer segments of society through infrastructure projects, it will more than likely be paid for by the middle-class.
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No. of Recommendations: 5
iampops5 write,

"Capital gains over $1MM taxed at 39.6%."

But if I know in advance that that will be the law when I die (hopefully decades hence), I can harvest capital gains at capital gains rates between now and then, and potentially build an estate well above $1M but with capital gains well below that.

If so, the law would apply only to a small number of wealthy people and only to the extent that the capital gains exceed $1M.

</snip>


That's very true. But you know that the wealthy opponents of the plan will be saying "If you have a $1 million, the libtards are going to take 40%." And the most ignorant and innumerate people in America will be eating it up.

Then we'll pay for infrastructure by raising their taxes, or cutting their benefits. <LOL>

intercst
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No. of Recommendations: 3
"While the proposed STEP Act appears to be a way to redistribute wealth from the "filthy rich" to the poorer segments of society through infrastructure projects, it will more than likely be paid for by the middle-class."

************************************************************************************

Perhaps the government should implement a tax on all those who finance political campaigns.

Howie52
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BCM: "For those sitting on highly appreciated stocks who hold them for income in taxable accounts who have held the shares for decades, as we have, can strategize realizing the gains over time by periodically selling and then immediately repurchase sufficient shares to gradually bring down the unrealized gains total while keeping in the 15% bracket and avoiding such things as IRMAA and the NIIT surtax."

I am not going to put too much thought into it until something like it is actually passed into law.

But that is along the lines of what I was thinking. Ispouse and I are 66 and 65 years of age, respectively. My main taxable account shows unrealized capital gains that are roughly 22% of the value of the account partly because I have harvested gains and losses to some degree over the years and partly because I was ignorant of the potential to utilize any sort of 'back door Roth' back when I was ineligible to open a regular Roth. So I was already transitioning money from sheltered accounts to taxable accounts, paying taxes, and growing them in stocks that appear to be good growth prospects with low tax consequences - like, for example, Berkshire Hathaway.

We are living on far less than the IRMAA threshold of $176,000 for 2021:

https://secure.ssa.gov/poms.nsf/lnx/0601101020

And we are already harvesting close to that threshold in sold equities annually so that we can pay a tax of either 22% on the money we take out of our sheltered accounts or 15% on the long term capital gains that we harvest.

Beyond that I am going to pay my CPA to run the numbers for me for next year because I even know enough to know what I don't know.
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Last sentence should have read, "don't even know enough to know what I don't know."
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But you know that the wealthy opponents of the plan will be saying...

Yes, I'm sure many uber wealthy will say that, at least to themselves. And they will have names like Buffett, Gates, Zuckerburg, Bezos, Bloomberg, Page, Castro, Winfrey, Soros, Steyer, Schultz plus a couple hundred others who proudly stood with Biden, with just ooodles of unrealized gains, carefully engineered to be unrealized.

But I don't think they'll use the term libtards, although they may be thinking it. Instead, they will do quietly in the collective what they did to Bernie....make sure it doesn't go anywhere. I mean, what do you think the likelihood is any of these names, or other similar names, go on the record supporting the STEP Act as written?

BruceM
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Federal Estate Tax not discussed in this one but current $11+MM exemption expected to be reduced to $3.5MM.

IF that happened, I'd have an appointment with my estate planner the next day. I'm sure trusts would be involved. I've worked too hard and saved too well to let Uncle Same get an extra cut of my money to waste. Much rather have my heirs waste it, however, I will try to spend it before I exit stage left.

JLC
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As the Millionaire Next DOor demonstrated vividly

The wealthy don't leave anything for the tax man when they die.

And no matter how Biden changes the rules, the 'wealthy' won't leave dimes to the feds when they die.

Warren Buffet has promised to donate all his wealth - sidestepping the tax man. Even the new proposal doesn't tax 'charitable donations'......

So I'm sure the kids will get the stuff with less than a million in unrealized cap gains...and the highly appreciated stock with go to the favorite charities....

and Uncle Sam will get squat.


t.
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No. of Recommendations: 15
I think having 2.5 to 3 million in taxable accounts does not fit the term middle class.
The top five percent net worth starts at 2.6 million.That is in no way middle class,and would imply zero planning to get some of your net worth into tax referred or tax free accounts.
I think some who live on the coasts or in major metro areas have a very loose definition of middle class,unless you mean something like most of my friends by middle class.


JK
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Dan Rostenkowski was the chairman of Ways & Means and Bob Packwood was chairman of Senate Finance. And Washington was a kinder, gentler place to do business.


+++
+++


OCD:


Rostenkowski was a convicted Felon for various acts done while in office.

https://en.wikipedia.org/wiki/Dan_Rostenkowski#Felony_convic...

While Packwood resigned {under threat of expulsion} from allegations of sexual misconduct(s).

https://en.wikipedia.org/wiki/Bob_Packwood


Not the "kinder, gentler" I ever wanna see repeated in the D.C. swamp!



sunray
a man with a memory
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No. of Recommendations: 8
telegraph writes,

Warren Buffet has promised to donate all his wealth - sidestepping the tax man. Even the new proposal doesn't tax 'charitable donations'......

So I'm sure the kids will get the stuff with less than a million in unrealized cap gains...and the highly appreciated stock with go to the favorite charities....

and Uncle Sam will get squat.

</snip>


There's long been a limit on how much of your annual income is eligible for the charitable deduction. I believe it was 60%, before they bumped it up to 100% as a one-time deal for 2020.

It's probably time we put some limit on the charitable deduction to the estate tax. Yale and Harvard don't need any more money. They'll never spend down the $30 to $40 billion endowments they already have.

If the wealthy pay less, the middle-class has to pay more to make up the difference -- it's just arithmetic.

intercst
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No. of Recommendations: 2
If the wealthy pay less, the middle-class has to pay more to make up the difference -- it's just arithmetic.

intercst


-----------------

Not really. Government spends what it wants to regardless of tax revenue and prints money to make up the difference. The inevitable inflation will ultimately reconsile the difference in the long term.

Taxing and spending are largely decoupled. For example $5 or $6T of covid relief was passed without any discussion of how to pay for it. Politicians talk about taxing this or that as a political talking point not out of a concern to pay for their usually ill conceived spending programs.
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I think some who live on the coasts or in major metro areas have a very loose definition of middle class,unless you mean something like most of my friends by middle class.

I was on a different forum this past week where one member thought middle class started at $150k in income.

PSU
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intercst:":There's long been a limit on how much of your annual income is eligible for the charitable deduction. I believe it was 60%, before they bumped it up to 100% as a one-time deal for 2020.

It's probably time we put some limit on the charitable deduction to the estate tax. Yale and Harvard don't need any more money. They'll never spend down the $30 to $40 billion endowments they already have.

If the wealthy pay less, the middle-class has to pay more to make up the difference -- it's just arithmetic."

That only counts for DEDUCTIONS against current income.

There is nothing in the tax code that forbids leaving your entire 50 billion dollar fortune to your favorite charity, in this case, the Bill and Melinda Gates Foundation.

Same for Bill Gates.

If the feds limit the deduction in the estate tax, I'm sure the 'wealthy' will find ways to side step that, or donate most of their fortunes before the grim reaper arrives.

As the Millionaire Next Door amply demonstrates, the 'wealthy' don't leave the tax man big bucks. It's mostly those who either die early (without planning) or middle class folks who manage to accumulate a bunch of assets.

However, in your case, I imagine you'll happily leave your fortune to the government to blow on porkulus, LGBT programs in Africa, writing mission statements for 10,000 US departments on 'diversity', etc. Not leave a dime to charity.

t.
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"I think having 2.5 to 3 million in taxable accounts does not fit the term middle class.
The top five percent net worth starts at 2.6 million."

Ah....statistics.

Yes, most folks while working in their 20s and 30s, even if stashing 30-40% of their paychecks, won't have 7 figure account balances. Might be middle class, but are in the accumulation phase.

However, many, if they started at 21, by the time they reach 55, if good investors - and saving more than allowed into 401Ks and IRAs, will reach 7 figure stock accounts - more by age 60 or 65.

If you're making $120K/yr.....and saving $40K a year...it doesn't take all that long to reach 7 figures at 11% stock market returns, compounded.

If you are saving that amount, you can't stash it all in tax deferred accounts.....

t.
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No. of Recommendations: 22
If you're making $120K/yr.....and saving $40K a year...it doesn't take all that long to reach 7 figures at 11% stock market returns, compounded.

In 2018, only 19.3% of tax returns filed had AGI of more than just $100k https://www.irs.gov/pub/irs-soi/18in12ms.xls much less $120k. And that doesn't include all of the people who didn't file tax returns because they didn't have enough income to do so.

Even if you consider middle class to be the middle 3 quintiles, making $100k puts you over middle class.

Giving an example of how easy it is for someone who is making $120k to get to 7 figures just helps validate that someone making $120k isn't middle class.

AJ
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As the Millionaire Next Door amply demonstrates,

1)This was published quite awhile ago.

2)Tax rules have changed.

3)IIRC, The Millionaire Mind cited a zip code that didn't exist. I live near it and noted that to the publisher with no response.

4)It was a statistical study, not a bible.

5)Tax rules changed again.
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"The real problem is determining the original basis.

I used to believe that determining cost basis of older assets would be a problem. However, after working on divorces, assisting with distributing several estates, watching business partnerships dissolve, in addition to the proliferation of computers in the last few decades; I've concluded, with motivation, determining the value of pretty much anything in the last 100 years is doable. The little which can't be, a WAG will suffice."
.
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I humbly disagree. I have prepared taxes for over 50 years and find that determining basis is one of the most difficult things for some folks.
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FWIW, Pew defines middle class thusly:

Pew defines the middle class as households that have an annual pre-tax income that is at least two-thirds to double the national median. That ranged from $48,500 to $145,500 in 2018

https://www.cnbc.com/2020/07/23/calculator-tells-you-whether...

And that's household income, not individual (though sometimes that's the same thing, of course).

So, yeah...$150K is right out (to quote Monty Python).
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AJ:"In 2018, only 19.3% of tax returns filed had AGI of more than just $100k https://www.irs.gov/pub/irs-soi/18in12ms.xls much less $120k."

AH....but you forgot a few details

- ---


Adjusted Gross Income (AGI) is defined as gross income minus adjustments to income. Gross income includes your wages, dividends, capital gains, business income, retirement distributions as well as other income. Adjustments to Income include such items as Educator expenses, Student loan interest, Alimony payments or contributions to a retirement account.

So some one making $110,000 a year, contributing 10K to their retirement fund, getting a 6% match on it for additional income not currently reported..... and maybe taking a few other 'off the top' expenses.....

For those over 50 or 55, doing 'catch up' extra contributions to their retirement plans.... that means they could be deducting, off the top, even more.

Plus of course, a lot of dual professional couples can easily get to 7 figure IRAs or retirement savings.

19% is still a lot of potential IRA 'millionaires' - like 20 million?

Some tidbits:

"The average salary for an entry level Computer Engineer is $69,365. An experienced Computer Engineer makes about $116,199 per year."

https://collegegrad.com/salaries/computer-engineer

The national average annual wage of an electrical engineer is $101,600, ac

Environmental Engineers made a median salary of $88,860 in 2019. The best-paid 25 percent made $114,25

The national average salary for a Cloud Engineer is $108,313 in United States.

https://www.glassdoor.com/Salaries/cloud-engineer-salary-SRC...

with some 'investment income' from a taxable account such as some dividends, the AGI of such engineers can easily hit $120K.....

but....if we take off $10K for IRA/401K contributions..... on paper, their AGI is a bunch lower.....

but that 10K is going toward retirement savings, often with a 5% match type deal.

That's 15% off the top toward the 40% goal.....

so they only have to save another 25% out of the 120K type income....which shows u with an AGI of 110K due to their contribution to retirement....

t.
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re: Millionaire Next Door -

Yes, but the principles stay the same......

and yes '2)Tax rules have changed."

when my mom died, the estate tax started at 550K...and my mom's estate, with one fairly expensive appreciated house, exceeded that and we paid a big bite of estate tax.


It went up...now 11 mil, coming back down to 3.5 million or something, then whacking you for capital appreciation - except at 38% type rates.....for anything over a million in cap gains.....


t.
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No. of Recommendations: 8
"I used to believe that determining cost basis of older assets would be a problem. However, after working on divorces, assisting with distributing several estates, watching business partnerships dissolve, in addition to the proliferation of computers in the last few decades; I've concluded, with motivation, determining the value of pretty much anything in the last 100 years is doable. The little which can't be, a WAG will suffice.""


A simple test.

A person owned 300 shares of AT&T in 1965.

In the next decade, AT&T split into 7 baby bells...and bell labs. Suddenly you owned shares in Ma Bell, 7 baby bells, and Bell Labs. The cost basis was divided up among your now 8 sets of shares. Oh, and likely you got a few 'fractional shares' that gave you some cash.

Now....in the next decade or so, some of them spun off wireless assets.....and most of them spun off their white pages operations. Suddenly you now owned like 14 different stocks.

Then, well, those baby bells started to merge again. Now you got AY&T, just a few baby bells, a bunch of other lesser things, ...maybe you sold your white pages deals as they were crap. Maybe sold your US West before it cratered.

What is the 'cost basis' for the remaining stocks. Oh, I forgot, along the way there were multiple splits. Some of those white pages stocks you owned got bought out or went BK.

test number 2.....

You bought stocks through your brokerage firm. 40 years ago. It was bought out by another....and that was bought out by another. Of course, all your stocks were dutiful transferred. However, if you go back and try to find out the 'cost basis' for that, your current brokerage will tell you that they don't have that information. You try to go back to the original company you bought them through but they don't exist and there are no records. Good luck on figuring that out. Oh, and of course, stock splits, 3 for 2 reverse splits, fractional shares, etc.

Now, if you buy stock, the 'cost basis' is included in the record. Before 1990 or 2000....it didn't seem to translate when firms got bought out.

Try finding the basis for stock XYZ that was taken over by company B in 1987....which merged with company C in 1994.....and now you own 287 shares in company C....

Figuring out some of my 'cost basis' is going to be a nightmare.



t.
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In 2018, only 19.3% of tax returns filed had AGI of more than just $100k https://www.irs.gov/pub/irs-soi/18in12ms.xls much less $120k. And that doesn't include all of the people who didn't file tax returns because they didn't have enough income to do so.

But this has nothing to do with the proposed STEP Act, as it excludes retirement plan savings. As said earlier, those who will exceed the $1MM of unrealized CG in their estate will be due to long held real estate with relatively small basis, savings in taxable accounts which will be large for some due to inheritance from their parents, business holdings and long held company stock. These don't so much have to do with household AGI, but have to do with buying/building and holding over extended periods to end of life....which can and often is very middle class.

And just for the sake of the argument above on retirement savings....The SOI data you quote on numbers of filers by AGI, these low AGI groups includes the very young such as college students and many young workers in entry level positions. What is more representative of accumulated wealth is to go to https://www.irs.gov/statistics/soi-tax-stats-accumulation-an... and go down to IRA by age. Of course, we don't know when those headed into retirement roll over their retirement plan into their IRA and how many do not roll them over but leave their savings in the plan. But if we assume ages 65 to 70 = full rollover, this means the average IRA end of year balance (2018) will be somewhere between $250K and $280K, so a two person household will have $500K - $560K over the 12.2MM or so in this age group. You probably don't have to shift too far to the right in this distribution to hit household retirement savings of $1MM.

BruceM
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I humbly disagree. I have prepared taxes for over 50 years and find that determining basis is one of the most difficult things for some folks.

Totally agree.

I worked in a FP firm with 2 CPAs and an EA who did taxes for clients. It made the firm little money but was offered in order to provide comprehensive planning services under one roof, which clients really appreciated.

I cannot begin to explain how much time was spent tracking down basis and adjustments to basis when long held assets were sold going into retirement. And it wasn't just old stock prices, it was the amounts spent in closing costs, capital improvements, past year's net operating losses, credit recaptures, and on and on. The IRS does (or did when I was there) allow 'reasonable' assumptions, but we had to have something to based the 'reasonableness' value on....we couldn't just make it up. I simply cannot imagine doing this on a national scale where adjusted basis must be established on all appreciated assets in the estate to determine the final unrealized gain.

Like a magic wand, step-up at death wafts away the basis issue.

BruceM
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Adjusted Gross Income (AGI) is defined as gross income minus adjustments to income. Gross income includes your wages, dividends, capital gains, business income, retirement distributions as well as other income. Adjustments to Income include such items as Educator expenses, Student loan interest, Alimony payments or contributions to a retirement account.

Ahh, but you forgot - you said $120k in income, and I only said $100k. That allows for $20k in 'adjustments'.

19% is still a lot of potential IRA 'millionaires' - like 20 million?

But my point was that your example wasn't middle class. So why are you trying to prove a point using an invalid example?

AJ
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So why are you trying to prove a point using an invalid example?

I'm not. You've got me confused with someone else, as I never said that.

BruceM
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Middle class.

I've seen middle class defined as anything over the poverty line, which for a family of four is $26,500 according to Google.

Poverty line to median household income ($68,703 in 2019) is usually described as lower middle class or working poor.

The line between upper middleclass and wealth is fuzzy but the President seems to be using $400,000/yr (but might be better defined in terms of net worth).
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I'm not. You've got me confused with someone else, as I never said that.

No, I think you're the one who is confused. I wasn't asking you that question. If you look at my post, you will see I was quoting and replying to tele, not you:

19% is still a lot of potential IRA 'millionaires' - like 20 million?

But my point was that your example wasn't middle class. So why are you trying to prove a point using an invalid example?


AJ
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Poverty line to median household income ($68,703 in 2019) is usually described as lower middle class or working poor.


Seems there would have to be some allowance for where you are living and perhaps also for net worth.
Money goes a lot further in suburban Pittsburgh, where I live, than in Seattle, where my daughter lives. For our county, median household income was around $58,000 in 2019. Seattle was about $95,000.

By net worth, we're > 90th percentile, but by the definition above, we would be considered middle class, possibly even lower middle class.

But, we're retired now and our income can be pretty much whatever we choose it to be, depending on what distributions we take from our retirement plans and how we arrange our taxable investments.
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I am in favor of better US infrastructure. We need to get rid of the lead pipes, and build better roads and rail.

The proposed 40% tax rate on inherited capital gains will mean more churn. People will buy and sell enough to keep their unrealized capital gains under $1M. So, the effective tax rate will be no higher than 20%, even for billionaires. This sounds fair. Wages are taxed at much higher rates. Someone has to pay the restaurant bill. Dine and Dash is not cool.

It is not clear how real estate and illiquid businesses can be treated fairly. Valuations are difficult without a sale. (My proposal: Maybe just drop the proposed tax on unrealized gains for tangible property. Instead, for illiquid assets, make no basis adjustment on death. No taxes due until the asset is sold.)
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BHM: Not really. Government spends what it wants to regardless of tax revenue and prints money to make up the difference. The inevitable inflation will ultimately reconsile the difference in the long term.

Not really. The differences will be reconciled on the backs of the poor. Inflation won't bother Mr. Bigbucks. His income will be adjusted as needed. The poor won't get any more income, only higher prices.

CNC
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I think some who live on the coasts or in major metro areas have a very loose definition of middle class,unless you mean something like most of my friends by middle class.

I was on a different forum this past week where one member thought middle class started at $150k in income.

PSU


We all see the world through our own spectacles. Why, I can even remember when a million dollars was a fortune.

CNC
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I humbly disagree. I have prepared taxes for over 50 years and find that determining basis is one of the most difficult things for some folks.

Difficulty depends upon individual skill set. My claim isn't that it's easy, my claim is it's reasonably possible, especially with a few years to prepare.

Our tax laws need to cover the majority of situations, 100% coverage for all situations is neither possible nor cost effective. I'm willing to claim, without any backing data, the majority of estates subject to estate taxes with a $500k exclusion, should have the wherewithal to establish cost basis for the majority of their assets.
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Figuring out some of my 'cost basis' is going to be a nightmare.

I had to do something like that for 50 year old GE stock. It wasn't hard, I used the average cost for that year. The IRS didn't complain.
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"I had to do something like that for 50 year old GE stock. It wasn't hard, I used the average cost for that year. The IRS didn't complain"

GE stock is easy. If you bought it through the company savings plan, they have records going back probably before 1950......and they can tell you how many splits (many) the stock had. It had no spin offs....so it is easy peasy.


The MaBell example is a horrid mess.

If you bought stock through a company plan, and that company isn't around, likely the records aren't around, and new entity has zero interest in getting those records or dealing with them.
Tons of companies have been taken over.

As to real estate, that too can be a real challenge if you had a succession of rental properties, depreciated each one, made Starker trades to avoid taxes, have current depreciation on the property....... and figuring out the 'tax basis'. If you're a smart landlord, you probably set up individual LLC for each entity for liability reasons. Now it's a 'corporation'. Own 20 rental properties (around here they're called 'rent houses' and it gets interesting. Of course, there's depreciation on them, but is the IRS going to know exactly how much and what the 'value' is in the property and what the original price was - through maybe a dozen trades/sales? hmmm.....another 10,000 IRS auditors and another 3000 tax courts for disputes.



t.
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Figuring out some of my 'cost basis' is going to be a nightmare.

See, here’s the deal. You’re dead. You don’t have to do anything.

Someone else is offered the following option: “There’s about $800,000 for you, plus or minus, but you have to figure out the cost basis of the stocks involved; or pay someone else to do it.”

“Oh no, that would be too much trouble. Keep it.”

Somehow it seems that would be an unlikely outcome.
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Not really. The differences will be reconciled on the backs of the poor. Inflation won't bother Mr. Bigbucks. His income will be adjusted as needed. The poor won't get any more income, only higher prices.

CNC


---------------

I was commenting on the inevitable inflation since out politicians are utterly not capable of constraining spending to match revenues. Rising prices affect everyone. Taxes only affect the people who pay them so naturally inflation hurts the poor more than the well off.

I shouldn't have to state the obvious.

PS - I am not sure how Mr. Big bucks automatically gets an inflation adjustment to his income.
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...politicians are utterly not capable of raising revenues to match spending.

Fixed that for you.
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As to real estate, that too can be a real challenge if you had a succession of rental properties, depreciated each one, made Starker trades to avoid taxes, have current depreciation on the property....... and figuring out the 'tax basis'. If you're a smart landlord, you probably set up individual LLC for each entity for liability reasons. Now it's a 'corporation'. Own 20 rental properties (around here they're called 'rent houses' and it gets interesting. Of course, there's depreciation on them, but is the IRS going to know exactly how much and what the 'value' is in the property and what the original price was - through maybe a dozen trades/sales? hmmm.....another 10,000 IRS auditors and another 3000 tax courts for disputes.

The IRS absolutely knows. The depreciation, and therefore the cost basis, is reported on each years taxes. In the event of a 1031 exchange, the old depreciation schedule simply rolls onto the new property. The cost basis for the new property is the acquisition cost minus the capital gain. An LLC is a disregarded entity for federal tax purposes.

You have to know what the rules are, but it isn't difficult.
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Difficulty depends upon individual skill set. My claim isn't that it's easy, my claim is it's reasonably possible, especially with a few years to prepare.

Difficulty also depends on what rules are involved. In an earlier post you said:

However, after working on divorces, assisting with distributing several estates, watching business partnerships dissolve, in addition to the proliferation of computers in the last few decades; I've concluded, with motivation, determining the value of pretty much anything in the last 100 years is doable.

Perhaps I am mistaken, but with a divorce as long as both parties accept that numbers are reasonable. isn't that it? Likewise if families are happy with how an estate is distributed, or partners are satisfied with the numbers when things are over? Aren't all those covered under civil law?

Tax law prevails for this board. I didn't notice you listing the IRS as a party in any of those examples listed.
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Even if you consider middle class to be the middle 3 quintiles, making $100k puts you over middle class.

I am sure it's obvious but the absolute level really does not matter. You should take into account where in the country people live. $120,000 in San Francisco is really roughly $50,000 in the middle of Texas. To almost anyone living in California except in the rural counties, $120,000 is enough to support a family of four, but in a rented apartment occasionally eating Ramen soup. I am sure New York City is even worse.
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From my perspective AGI is relevant for workers but not so much for retirees or wealthy people. Many baby boomers have a net worth in 90-99 percentile and an AGI in a much lower category. I suspect that is true of many of the posters on this board.
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GE was purchased on open market by someone dead at the time of sale.

The vast majority of people do not have financial transaction as complex as described. I suspect most of the transactions described leave some form of a papertrail with the IRS or financial institutions. And anyone who has such complex transactions should be smart enough to keep notes.

Currently the way estate taxes are set up, people are avoiding millions of dollars in taxes which they'd otherwise pay if they hadn't died, this seems a bit inappropriate. I don't want to pay taxes because I made a profit while living, and someone else making the same profit doesn't pay taxes because they died.

There will be awkwardness during the transition, and there will be hard luck stories, but I'm sure the free market will come up with a solution.

Given the degree of market distortion caused by marking assets to market at death, I'm surprised those who believe in minimal government intrusion aren't in favor of abolishing marking-to-market.
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Perhaps I am mistaken, but with a divorce as long as both parties accept that numbers are reasonable. isn't that it? Likewise if families are happy with how an estate is distributed, or partners are satisfied with the numbers when things are over? Aren't all those covered under civil law?

Cost can count when assets are both community and separate, such as houses purchased before marriage. The discussion is about determining historical value, not civil or criminal law. BTW: generally taxes are civil not criminal law.

Tax law prevails for this board. I didn't notice you listing the IRS as a party in any of those examples listed.

In this discussion the IRS is both a source of information, such as previously filed tax documents, and recipient of information. I saw no reason to mention either role nor did I see the needs to mention other repositories of informations, such as banks, financial firms, real estate agencies, insurance companies, or county tax boards.

My guess is the 98/2 rule applies, 98% will have a relatively easy time, the other 2% will have to work harder. In return the tax burden gets closer aligned with profit.
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Given the degree of market distortion caused by marking assets to market at death, I'm surprised those who believe in minimal government intrusion aren't in favor of abolishing marking-to-market.

</snip>


Folks only "love the Constitution" when it's profitable for them to do so. And they'll quickly abandon it if there's a buck to made being "Unconstitutional".

intercst
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My over 50 years as a CPA ding taxes says that your 2% is way off the mark. Most people can't tell you how much they made last year, they can tell you their take home but not gross.
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Folks only "love the Constitution" when it's profitable for them to do so. And they'll quickly abandon it if there's a buck to made being "Unconstitutional".

Maybe they are a bit uptight because they resist taking
their morning constitutional.

vez
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My bias is to Ronald Reagan small government and low taxes. That being said, if they have to have death taxes, I'd like to see them agree on an estate tax exemption that everyone can live with and no capital gains upon death. My point is to have a single death tax, not multiple overlapping death taxes.

As an aside, I was annoyed when I heard that Biden wants to eliminate the cap gains basis step up. But I figured many could avoid that by not selling inherited assets. But forcing that tax to be due upon death, even if unrecognized, seems like an overstep. I hope this is just a bargaining chip, but I fear that Biden has enough votes to truly punish the affluent under the guise of "tax fairness" for the rich.
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I meant to say that I was shocked when I learned the goal was to force tax upon death, even on unrealized capital gains.

How does one EDIT a post?
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I meant to say that I was shocked when I learned the goal was to force tax upon death, even on unrealized capital gains.

How does one EDIT a post?

--------------------------------
You can't edit it after you post, unlike Facebook or other social media venues.

Best move: Post a correction or clarification, like you just did.
Sometimes when people post something that's just erroneous, they will report their own posting, and ask that it be deleted.

Bill
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Thank you for that info. Kinda archaic that you can't edit posts, but OK!
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How does one EDIT a post?

You can't. But there is a preview button you can use to see if your post/reply makes sense. Kinda like "thinking before you speak" of which I myself could do more of.

MoneySlob
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Kinda archaic that you can't edit posts, but OK!

TMF started as an investment focused community. The inability to edit posts was to prevent people from going back and reposting their recommendations after the fact, because hindsight is 20/20.

AJ
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Well, a lot of sites let you edit your post, but only for a limited time like 5 minutes or so.

But you can always report your own post and ask to have it deleted. Has always worked for me.
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The inability to edit posts was to prevent people from going back and reposting their recommendations after the fact, because hindsight is 20/20.

These boards are freebies so I don't get greedy with 'asks' or see the effectiveness of complaining too much.

That said, I don't really care if someone reposts their recommendations - that's their problem - although I could see some people being offended by it. It would be nice, though, to be able to edit simple typos, and bad or partial links that were inadvertently copied. The editing time/date stamp has been a feature of quite a few applications and document markup for many, many years. That could solve both problems as a simple "last edit by poster" would indicate that changes have been made.

Ah, the wish list :)

Pete
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