Revenues
Change the Taxation of Assets Transferred at Death
CBO periodically issues a compendium of policy options (called Options for Reducing the Deficit) covering a broad range of issues, as well as separate reports that include options for changing federal tax and spending policies in particular areas. This option appears in one of those publications. The options are derived from many sources and reflect a range of possibilities. For each option, CBO presents an estimate of its effects on the budget but makes no recommendations. Inclusion or exclusion of any particular option does not imply an endorsement or rejection by CBO.
Billions of dollars | 2025 | 2026 | 2027 | 2028 | 2029 | 2030 | 2031 | 2032 | 2033 | 2034 | 2025– | 2025– | |
Decrease (-) in the deficit | |||||||||||||
Enact carryover basis for assets held until death | -1.0 | -7.5 | -11.5 | -15.1 | -18.6 | -21.9 | -25.1 | -28.5 | -32.0 | -35.6 | -53.7 | -196.9 | |
Include accrued capital gains in the last income tax return of decedents | -9.1 | -48.7 | -46.8 | -48.8 | -51.9 | -55.8 | -60.5 | -65.8 | -71.4 | -77.3 | -205.3 | -536.1 | |
Data source: Staff of the Joint Committee on Taxation.
This option would take effect in January 2025.
When people sell an asset for more than the price for which they obtained it, they realize a net capital gain. The net gain is typically calculated as the sale price minus the asset's adjusted basis—generally the original purchase price adjusted for improvements and depreciation. To calculate the gains on inherited assets, taxpayers generally use the asset's fair-market value at the time of the owner's death, often referred to as the stepped-up basis, instead of the adjusted basis derived from the asset's value when the decedent initially acquired it. When the heir sells the asset, capital gains taxes are assessed only on the change in the asset's value relative to the stepped-up basis. As a result, any appreciation in value that occurred while the decedent owned the asset is not included in taxable income and therefore is not subject to the capital gains tax.
This option consists of two alternatives that would change how capital gains (or losses) on assets transferred at death were taxed. Under the first alternative, taxpayers would generally adopt the adjusted basis of the decedent (known as carryover basis) on assets they inherit. As a result, the decedent's unrealized capital gain would be taxed at the heirs' tax rate when they eventually sell the assets. (This alternative would adjust the basis of some bequeathed assets that would be subject to both the estate tax and the capital gains tax. That adjustment would minimize the extent to which the asset's appreciation in value would be subject to both taxes.)
Under the second alternative, capital gains would be taxed as if the decedent had sold the asset at death. Capital gains realized at death would generally use the adjusted basis derived from the asset's value when the decedent initially acquired it. The capital gain would be included as taxable income on the decedent's final income tax return. This alternative would not change the heir's stepped-up basis. Under this alternative, the capital gains taxed at death would be deductible from estate taxes to avoid taxing the same appreciation under both taxes.