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What is a step-up in basis for tax purposes?

On Behalf of | Aug 6, 2021 | Estate Planning

Many people become confused over the meaning of cost basis, as it is a term that accountants and tax specialists use to determine the worth of certain assets and how much tax must be paid. Understanding what cost basis is and how using a step-up in basis can make a difference when leaving assets to your heirs in Pennsylvania.

What is step-up in cost basis?

Original cost basis is the amount you pay when you acquire an asset. the IRS uses this definition for tax purposes. Step-up in cost basis is an adjustment that lowers capital gains taxes if your heirs sell assets left to them after you pass. If your heirs sell the assets from their inheritance, they must pay capital gains taxes on the profits. Step-up in cost basis considers the asset’s fair market value if purchased on the date of the decedent’s death.

How step-up in cost basis works

Utilizing the step-up in cost basis loophole is useful in estate planning as it will ultimately save your heirs money. It applies if you hold onto your assets and pass them onto your heirs in your will. It works for real estate and all types of investment accounts.

Is step-up in cost basis best for my estate?

Many high worth individuals have started to use this to bypass taxes and pass on their wealth. However, it’s not the only tool that investors and estate planning attorneys use.

When establishing your will and other estate planning tools, carefully consider which assets could benefit from a change in cost basis. It’s also a good idea to review your plan periodically to ensure that it is up-to-date.

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