Friday Reading: Kill the Step-Up In Basis Too

By Harry Sit

How I outsource my life (Part I) and How I outsource my life (Part II) by Liz Weston

Personal finance guru Liz Weston shares with us how she used outside help for buying a car and for picking out clothes. If it’s not any more expensive than doing it on our own when you take into consideration getting a deal you can’t get on your own and the waste in buying the wrong items, I wonder why we shouldn’t all use experts who do it day in and day out.

I think it must be the search cost: how do you know that expert is really an expert. Do you think it’s cost effective to use a concierge like she did or do you think it’s a luxury of the affluent?

*****

Tax Expenditure of the Week: Step-Up in Basis from Center for American Progress

White Coast Investor disagreed with my comments last week about killing the stretch IRA. He said the taxable accounts get a step-up in basis at death and therefore IRAs should get a commensurate benefit at death as well.

It made me wonder why step-up in basis must be etched in stone. If I use my assets when I’m alive, I pay capital gains tax. If I die, the deferred capital gains tax liability evaporates. Why? It turns out that step-up in basis is the fifth-largest tax expenditure, larger than the tax deduction on donations to charities.

I say we should kill the step-up in basis as well.

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Buy and Hold vs Market Timing, 2012 update from Sound Investing

This is not an article. It’s an audio monologue by investment advisor Paul Merriman. Mr. Merriman gave an update of empirical results from his firm’s buy-and-hold and market timing strategies. Buy-and-hold (and rebalance) had a higher average return and a higher risk. A 70% equities portfolio using market timing had comparable risk and return with 50% equities using buy-and-hold. Paul Merriman said in a comment on my previous post Market Timing vs Conservative Portfolio:

“The main difference is with buy and hold you accept one big mistake and with timing many small mistakes.”

I think that puts it very well. One big mistake: a stock market crash. Many small mistakes: false alarms — dips that look like the early stage of a crash but don’t develop into a crash.

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A model form for mortgage statements from the Consumer Financial Protection Bureau

This one is a little bit of a puzzle. I previously linked to CFPB’s effort on redesigning the mortgage disclosure form (combining the GFE and Truth In Lending statements). Now they turned their attention to the monthly mortgage statement. They are trying to standardize it.

I don’t see how the monthly mortgage statement is a problem area. The monthly mortgage statement can’t be any simpler. It usually has just one line: the payment. The statements from different banks all show the beginning principal balance, amount applied to principal, amount applied to interest, ending principal balance. If there’s escrow, the same thing: beginning balance, addition to escrow, ending balance. What can be confusing?

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I heard this on Freakonomics Radio. A professor at UCLA developed a 40-question quiz to find out someone’s Political Quotient (PQ), with 0 being super-conservative and 100 being super-liberal. Prior to this I had no idea whether I’m conservative or liberal. I did the quiz; now I know. Do you know your PQ? Can you guess my PQ?

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USAA’s retirement planner and financial goal-planning tools by Doug Nordman at Military Retirement & Financial Independence

Doug played with some new retirement planning tools from USAA. He said they are the easiest and most user-friendly planning tools he’s ever used. I’m actually wary of easy-to-use tools because the not stated and not modifiable assumptions can throw things way off. Try those tools from USAA and see if how you like them.

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TIAA-CREF Launches New Internet Bank with Top Savings Account Rate from Ken at DepositAccounts.com

A new online bank from TIAA-CREF. In a low interest rate environment, it’s tough to make people switch. TIAA-CREF is offering an introductory 1.25% yield on its online savings account (versus 0.8% at ING Direct, 1.0% at Alliant Credit Union). A mere 0.25% is not going to make me move, especially when I also have 0.95% checking account at Alliant Credit Union.

Blog of the Week: My Dollar Plan

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Posted on February 24, 2012 under News. Keywords: , , , .

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Comments

13 Comments on Friday Reading: Kill the Step-Up In Basis Too

  1. nickel on February 24, 2012
     

    Can’t say that I disagree with you on the step up issue, and if pitched right it should be one of the easier tax hikes to implement. That is to say, if given a choice between (say): [a] high capital gains rates now, or [b] a loss of the step up in basis after death, I’d be willing to bet that most would most would choose the latter.

    I know that many would choose secret option [c] (no increase whatsoever, or even cuts) but the reality is that we likely need to both increase revenue and decrease spending to get the national debt under control.

  2. edward on February 24, 2012
     

    Re: TIAA_CREF

    Meh. Ally doesn’t do 2 yr, but they beat T-C only the only other 2 CD terms (6, 12 mo) in common.
    No immediately available statement on early withdrawal, but I suspect they don’t do better than
    Ally’s 2 month penalty. Even if you don’t expect to go the distance, the Ally 5 yr CD with penalty
    quickly beats any other CD term. But, some people have this mental block about paying early
    withdrawal penalties, and settle for a lower rate to match the term. No amount of spreadsheet
    projection can convince them which is the better strategy. Oh well.

  3. Guest on February 24, 2012
     

    Regarding the step up issue, you’re forgetting that the gains are taxed at death. The estate tax is imposed on the full value of the assets (not just the capital gain), and it is imposed at the highest ordinary income tax rate instead of the capital gains rate. If estate tax is not imposed for some reason, like when the estate tax went away for a year, there is no step up in basis.

    I can get on board with the idea of getting rid of the estate tax and the basis step up rule at the same time.

  4. TFB on February 24, 2012
     

    Few pay estate tax anyway. Keep it simple: capital gains tax due at death, no step up in basis, no estate tax.

  5. Guest on February 24, 2012
     

    If you pay capital gains tax and then don’t get to step the basis up, you’re taxing the gain twice. That doesn’t make sense.

    Consider this example:
    A guy dies with stock worth $100 but with a tax basis of $50. The heirs immediately sell the stock for $100. Your way would have the decedent paying tax on the gain and the heirs also paying tax on the gain. That’s tax tax on the same $50 gain twice. If instead you get rid of the estate tax and step up, no tax is due just for the fact he died. The heirs can decide whether to sell the stock immediately and pay the gain or hold the stock, but either way the gain is only taxed once.

  6. TFB on February 24, 2012
     

    @Guest – Sorry I wasn’t clear in my brief comment. If someone dies with a $100 stock and $50 basis. The decedent would owe the capital gains tax on the final tax return. The executor can sell the stock or pay the tax with money from other sources in the estate. Whatever is left is distributed to heirs. After paying the tax, the basis is already raised to the market value. There is nothing to step up. The difference between this and carrying over the basis to the heirs is that heirs won’t be able to defer the tax further by holding the stock. The decedent already deferred the tax long enough.

  7. KD on February 24, 2012
     

    I am guessing your PQ is about 40.

  8. TJ on February 25, 2012
     

    Re: the step up issue, that’s the whole reason fro the estate tax.

    Someone with more than 5 million, or whatever the limit is, their estate has to pay taxes on whatever gets transferred over the exemption.

    Killing the step up would only benefit the insurance companies in pushing the likes of annuities and investment-filled life insurance.

    Would you also propose removing the ability of donating appreciated shares without paying gains? I imagine that’s another big one that only the wealthy would take advantage of.

  9. TFB on February 25, 2012
     

    @KD – That’s close. It’s 45.

    “Politicians with similar PQs are:

    Tom Ridge (R-Penn., 1983-1994) PQ=37.4
    Sam Nunn (D-Ga., 1973-96) PQ=39.5
    Susan Collins (R-Maine, 1997-2009) PQ=44.2
    Olympia Snowe (R-Maine, 1979-2009) PQ=47.9
    Arlen Specter (R-Penn., 1981-2008) PQ=50.6″

    @TJ – As I already mentioned in the previous comment, estate tax isn’t very effective anyway. The insurance problem can be dealt with easily: tax the gain in cash/surrender value. Yes I would also propose removing the ability of donating appreciated shares without paying gains. A deduction is already a good enough incentive. Considering that many would donate without a deduction, even capping the deduction wouldn’t affect charities that much.

  10. TJ on February 25, 2012
     

    @TFB I’d be in favor of it only if it applied to the insurance products too.

    These ideas would all be better than jacking up income taxes on everybody.

  11. David C on February 25, 2012
     

    @TFB
    So… are you saying you would:
    1) make people pay taxes on appreciated shares but they could then deduct the full donated amount as a charitable gift or
    2) let people avoid paying taxes on appreciated shares but in return they cannot deduct the full donation amount (only the principal amount could be donated)

    Doesn’t matter to me since my investments are all in tax-advantaged accounts… just curious.

    I scored a 47.8 on the PQ survey but I answered “I don’t know” quite a number of times…

  12. Nords on February 25, 2012
     

    Thanks for the link, @TFB!

    As a retirement calculator geek, I was hoping for something to rival FinancialEngines.com or ESPlanner. What USAA gave us, however, was a very simple tool that integrates USAA’s accounts with whatever else the user wants to share (other brokerage accounts, online banks). They’ve “dumbed it down” to the lowest common denominator of their membership, and they hit them right between their demographic eyeballs. The calculator still gives good numbers (especially for military pensions, which most retirement calculators don’t understand) but it doesn’t give much user control over tweaking assumptions & parameters.

    I guess it’s a gateway drug to hook the next generation of retirement-calculator geeks, who can learn the ropes at USAA and be ready to step up to a more robust tool.

    Meanwhile we’re STILL waiting on the FIRECalc upgrades…

  13. TFB on February 25, 2012
     

    @David C – I was talking about your (1) make people pay [capital gains] taxes on appreciated shares but they could then deduct the full donated amount as a charitable gift. But I also think we can put a reasonable cap on the deductible amount, say $100,000 a year.

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