December 18, 2019

As of November 2019, Senator Elizabeth Warren of Massachusetts is one of the front runners in the Democratic primary contest to determine the party’s 2020 presidential nominee. She has released detailed proposals for programs she would support as president. One initiative that has caught the attention of our California tax advisors involves proposed changes to the Internal Revenue Code (IRC) that would provide additional revenue to the federal government. Rather than expand the longstanding trend of taxing individual and business income, Senator Warren’s proposals would tax wealth and eliminate a major loophole with regard to the taxable value of inherited property.

What Is a Wealth Tax?

The Sixteenth Amendment to the U.S. Constitution, ratified in 1913, authorized Congress to impose an income tax at the federal level. This has been the primary source of tax revenue for the federal government ever since. The idea, for many, is that people with greater income would pay larger amounts of tax in order to benefit society as a whole. The IRS collects taxes on income, and on capital gains from the sale of assets.

Unlike income tax, which looks at how much a person earns in a particular year, a wealth tax would look at how much wealth a person has accumulated. A high net worth does not necessarily mean that a person has a high income, and vice versa. The New York Times notes that one of the richest people in the United States (and the world) has a net worth of about $84 billion, but an annual salary of only $100,000, plus capital gains on assets he actually sells. Under current tax law, he only pays tax on that income.

Senator Warren’s proposed wealth tax would not impose any new taxes on individuals and families whose net worth is less than $50 million, based on current IRS methods of calculating net worth. Households with net worth of $50 million to $1 billion would pay a tax equal to two percent of their net worth, or between $1 million and $20 million. Households with net worth of more than $1 billion would pay an additional “billionaire surtax” of one percent. Taxpayers would be able to defer payment for up to five years if they can show that they lack the liquidity to pay in full.

What Is Stepped-Up Basis?

Basis” refers to the price that a taxpayer initially pays for an asset, or the initial value attributed to an asset. When they sell the asset, the amount that is subject to capital gains tax is the sales price minus the basis. For example, if a taxpayer buys stock for $1,000, and sells it for $1,500, the “gain” for tax purposes is $500.

Section 1014 of the IRC provides a “stepped-up basis” for property acquired through inheritance. The basis for the recipient of the property is the fair market value as of the decedent’s death. If a taxpayer inherits stock that the decedent bought for $5, but which is now worth $1,000, the taxpayer’s basis would be $1,000. Senator Warren’s campaign has stated that eliminating the stepped-up basis rule would generate $100 billion over the next decade.

If you need assistance with resolving a tax-related issue in California, the tax advisors at the Enterprise Consultants Group are available to answer your questions and help you understand your options and rights. Please contact us online or at (800) 575-9284 today to schedule a consultation about your case.