taxes

5 tax deductions that favor the rich

Step-up in basis: how the rich remain rich
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Step-up in basis: how the rich remain rich

If the wealthy enjoy roughly $40 billion in tax breaks each year thanks to the favorable 15 percent capital gains rate, their heirs save even more, courtesy of the step-up in basis rule in the U.S. tax code.

What's the step-up all about? Essentially, it allows the wealthy to pass along assets that have grown in value to their heirs without ever paying a dime of taxes on it.

Under special Internal Revenue Service inheritance rules, when you inherit assets such as stock, real estate or a closely held business, you are allowed to step up their basis -- what the deceased originally paid for them -- to their current fair market value. Therefore, when you sell the assets, you would only be taxed on their gain in value from the time you inherited them.

Step-up in basis is expected to save the wealthy (and cost Uncle Sam) $61.5 billion for fiscal 2012, according to the Office of Management and Budget.

"Not surprisingly, this tax expenditure overwhelmingly benefits those who inherit from large estates because it allows gains to escape capital gains taxes if held until death," says Hanlon.


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