When working in the field of tax-related issues, it is easy to become confused by certain terms. One of these terms is “tax basis.” Have no fear, it is actually a useful term that is not too challenging to grasp once explained.

What does tax basis mean?

The term “tax basis” describes the value of an asset and is used for computing the gain (income) or loss of value when the asset is sold. In other words, if an asset gains in value while it is owned, that gain is considered income, and the income (rather than the base or original amount) is considered taxable. If the base value amount can be increased, then the income attained is less. As a result, the taxable amount is often less. This is a big benefit for the taxpayer.

Assets acquired upon another person's death usually take a tax basis to the heir equal to the asset's fair market value at the date of death rather than the original tax basis of when the decedent obtained the asset. This can apply to real property (e.g. house) or invested funds. For example, if the decedent purchases 1,000 shares of stock at $10 a share and died when the shares were worth $50 a share (a $40,000 unrealized gain), the heirs can take these assets on a total basis of $50,000. In turn, these shares can be sold for $50,000, free of income (capital gains) tax.

Whipple Law Group Tip: Periodically reviewing your estate plan is advisable to take into account the changes in estate and gift tax rules, as well as rules on items that affect the size of your estate including retirement and education funding plans. Amounts subject to estate tax, and estate and gift tax rates, are fair market value basis at death is usually a step up in basis, though the basis is stepped down at death where value has fallen below the original cost.

Review your estate planning with the Whipple Law Group

The tax laws are constantly changing. It is imperative that you work closely with your tax professional and attorney to examine your situation in light of current federal and state codes. Please feel free to contact us at the Whipple Law Group to discuss your estate planning circumstances so that you can choose the most beneficial strategy for your family.