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A better look at the “stepped-up basis”

On Behalf of | Sep 20, 2021 | Estate Administration

Estate administration is effective but only when you’ve predetermined how your estate gets handled and by whom. What happens after your death has a better chance of meeting your wishes if you start estate planning now. Pennsylvania residents even have “loopholes” that protect their estates from taxation. Though the money you earn from investments is taxed, here’s how many avoid it.

What are capital gains?

For starters, capital gains are calculated as the profits you make from an asset. Profit and income are the same, but capital gains come from investments. Stocks that earn $1,000 leave you with a taxable profit of $1,000. Capital gains are necessary to understand because the loophole on a stepped-up basis lets capital gains pass without taxation.

Resetting estate values

Capital gains are calculated by subtracting the original asset against its current value. The monetary difference is capital gains. This process is called a reset. It’s when your estate is under tax review, so the IRS resets it, taking your estate values back to their start. For some, it’s an issue during the estate administration process while others, if using a stepped-up basis, benefit.

Here’s the stepped-up basis

Instead of resetting your estate values to their original sums, a stepped-up basis resets your estate’s values to current market prices. At this point, any withdrawal from an estate is granted tax-free. Usually, your beneficiary pays taxes on the capital gains your assets incurred. If those assets, however, get stepped up to account only for current, and not past, prices, then you still profit without capital gains.

Now your beneficiaries don’t have to withdraw tax-free upon receiving an estate. However, a tax then applies as they incur capital gains from the date their assets were inherited. Taxes are also applied on any future withdrawals.

To learn more, visit our Estate Planning and Probate/Administration page.

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