There is an interesting article in today's Wall Street Journal entitled "Will the Estate Tax Disappear?" The author, Laura Sanders, talks about how, under current law, from January 1, 2010 through December 31, 2010, there will be no estate tax. Starting on January 1, 2011, the estate tax comes back, and the exemption from estate taxes is reduced from the current level of $3,500,000 to $1,000,000.
What the Wall Street Journal article highlights is that if the estate tax disappears in 2010, then the step up in basis at date of death will disappear as well. This is how Congress and the Bush administration made the 2001 tax reform act revenue neutral – so that the loss of revenues of the estate tax would be made up by the gain in revenue from the loss of the step up in basis.
The Wall Street Journal article explains that if your grandmother left you stock selling for $75 a share on her date of death that she bought in 1970 for $2 a share, under current law, your cost basis in the stock would be $75. Thus, if you sold the stock for $80.00 after your grandmother's death, your taxable gain would only be $5 per share. However, if the step up in basis goes away, your cost basis would be $2, not $75, and you would have a tax bill based on a $78 gain, rather than on a $5 gain.
The Wall Street Journal article also notes that only 5,500 estates are subject to estate taxes every year. In contrast, there are probably millions or tens of millions of people who would suffer by virtue of the loss of the step up in basis. Moreover, the last time Congress tried to eliminate the step up in basis at death, it simply did not work because of recording keeping issues. How would the grandchildren of a taxpayer have any way of proving what their deceased grandparent bought a stock for in 1972? How would the IRS prove the same, or disprove the family’s claim?
Thus, it likely is the case that both the estate tax and the step up in basis will remain with us. It is a matter of seeing what bill Congress passes and when Congress passes that bill. Congress has until about September 2010 to take action in order to enable Congress to apply any change in the tax law retroactively to January 1, 2010. An alternative approach is that there is a bill pending in Congress to extend the existing exemption of $3,500,000 through December 31, 2010 so that Congress can take up the issue next year without the pressure of a September deadline. We will keep you posted on any new developments.