31:T69b,md`In other words, inheritors get to pretend they bought property when they really just inherited it for free. This tax break cost the US government about $37 billion in 2018. Most of this benefit goes to people who are already well off. Not only that, but this provision harms the economy by incentivizing people to hold on to property for longer than they should. Let's pretend that Alice has $100 of Acme stock and knows she is likely to pass away within the next few years. She wants to pass on her money to her son, Bob. She can: (a) Hold on to the stock until she dies, so she can pass it on tax-free to Bob. (b) Sell the stock, pay taxes on her profit of $90, and give the remainder to Bob. Alice is incentivized by the tax code to choose (a). Without this provision, Alice might be willing to sell off her stock sooner, to give money to Bob or to invest money in other businesses. **🤬So why does this loophole exist?** A few reasons, none of which are particularly compelling to me. - The current rules prevent double taxation of people who have to pay estate tax (i.e., people with property worth more than $11 million dollars). Canada used to have a similar tax structure, but they've been able to change it to eliminate this loophole, so I don't think this objection is insurmountable. - Figuring out the original basis of inherited property used to be difficult. Before computers, it was hard for inheritors to find proof of the original basis of inherited property. However, these days, with electronic record-keeping, it is usually easy to keep track of the original basis. - The current rules made sense historically, based on past rules and circumstances.`32:T76d,basisRealizationGraph = (dataset, showAxis = true, color = "green") => { // Create the canvas const svg = d3 .select( DOM.svg( width + margin.left + margin.right, height + margin.top + margin.bottom ) ) .attr("width", width) .attr("height", height); // Add margins const g = svg .append("g") .attr('transform', `translate(${margin.left}, ${margin.top})`); // Constants const maxDomain = 200; // Scale const x = d3 .scaleLinear() .domain([0, maxDomain]) .range([margin.left, width - margin.right]); const y = 50; // Draw lines const line = d3 .line() .x(d => x(d)) .y(y); // g.append("path") // .datum([0, maxDomain]) // .attr('d', line) // .style("stroke-width", 1) // .style("stroke", "grey"); g.append("path") .datum(dataset.values) .attr('d', line) .style("stroke-width", 5) .style("stroke", color); // Draw dots g.selectAll("circle") .data(dataset.values) .join("circle") .attr("transform", d => `translate(${x(d)},${y})`) .attr("r", 7) .attr("fill", color); // g.append("circle") // .datum(dataset.values[1]) // .join("circle") // .attr("transform", d => `translate(${x(d)},${y})`) // .attr("r", 5) // .attr("fill", "none") // .attr("stroke", "green") // .attr("stroke-width", 1.5); // Left label g.append("text") .attr("x", 0) .attr("y", y + 5) .attr("font-size", 30) .attr("text-anchor", "end") .text(dataset.name); if (showAxis) { // X axis const xAxis = d3 .axisBottom() .scale(x) .tickFormat(d3.format("$")) .ticks(4) .tickSize(10); g.append("g") .attr("transform", `translate(0,${height - margin.bottom})`) .call(xAxis) .call(g => g.selectAll(".tick text").attr("font-size", 18)); } return svg.node(); }33:[] 2f:{"title":"US Tax Loopholes - Part 1","cells":[{"id":0,"value":"md`# US Tax Loopholes - Part 1\nThis is the first of a collection of tax loopholes I learned about in a US income tax class I took a few years ago.`","pinned":false,"hidden":false,"mode":"ojs"},{"id":18,"value":"md`## Stepped up basis\n\nLet's say Alice buys $10 worth of stock of Acme Inc. She holds onto it for 10 years. In that time, Acme develops a bestselling avocado 🥑 toast maker and its stock price goes through the roof 📈. Alice sells her stock for $100. In a picture:`","pinned":false,"hidden":false,"mode":"ojs"},{"id":317,"value":"basisRealizationGraph({ name: \"Alice\", values: [10, 100] }, true, \"black\")","pinned":false,"hidden":false,"mode":"ojs"},{"id":327,"value":"html`The black color of the line indicates that Alice has not yet paid taxes.
\nWe'll color the line green when she pays taxes.`","pinned":false,"hidden":false,"mode":"ojs"},{"id":313,"value":"md`**How much money will Alice be taxed on?**\n\nThere are two options: \n\n(a) Alice can pay taxes on $100, her _proceeds_ from the stock sale`","pinned":false,"hidden":false,"mode":"ojs"},{"id":53,"value":"basisRealizationGraph({ name: \"(a) 15% of\", values: [0, 100] })","pinned":false,"hidden":false,"mode":"ojs"},{"id":165,"value":"md`(b) Alice can pay taxes on $90, her _profit_ from the stock sale`","pinned":false,"hidden":false,"mode":"ojs"},{"id":171,"value":"basisRealizationGraph({ name: \"(b) 15% of\", values: [10, 100] })","pinned":false,"hidden":false,"mode":"ojs"},{"id":183,"value":"md`The US tax code chooses option (b). People only have to pay taxes on their profits, not their proceeds.\n\nIn tax code parlance, $10, the price at which Alice bought the stock, is the *basis*. \n\n$100, the price at which Alice sold the stock, is the *amount realized*.\n\nPeople are taxed on their gain, calculated as: \n\n*Gain = Amount Realized - Basis*\n\nFor Alice, gain = $100 - $10 = $90. So Alice pays taxes on $90.`","pinned":false,"hidden":false,"mode":"ojs"},{"id":205,"value":"md`**Now let's look at a different situation.**\n\nWhat happens if Alice sold her stock for $100 to Bob?`","pinned":false,"hidden":false,"mode":"ojs"},{"id":210,"value":"basisRealizationGraph({ name: \"Alice\", values: [10, 100] }, false)","pinned":false,"hidden":false,"mode":"ojs"},{"id":224,"value":"basisRealizationGraph({ name: \"Bob\", values: [100] }, true, \"black\")","pinned":false,"hidden":false,"mode":"ojs"},{"id":227,"value":"md`Alice pays taxes on her gain of $90, and Bob gets stock with a basis of $100.\n\n5 years later, Bob sells the stock for $150.`","pinned":false,"hidden":false,"mode":"ojs"},{"id":351,"value":"basisRealizationGraph({ name: \"Alice\", values: [10, 100] }, false)","pinned":false,"hidden":false,"mode":"ojs"},{"id":342,"value":"basisRealizationGraph({ name: \"Bob\", values: [100, 150] }, true, \"black\")","pinned":false,"hidden":false,"mode":"ojs"},{"id":243,"value":"md`Bob now has to pay taxes on his gain. \n\nBob's gain = $150 - $100 = $50. So Bob pays taxes on $50.`","pinned":false,"hidden":false,"mode":"ojs"},{"id":230,"value":"basisRealizationGraph({ name: \"Alice\", values: [10, 100] }, false)","pinned":false,"hidden":false,"mode":"ojs"},{"id":234,"value":"basisRealizationGraph({ name: \"Bob\", values: [100, 150] })","pinned":false,"hidden":false,"mode":"ojs"},{"id":357,"value":"md`**What happens if Bob inherits the stock from Alice?**\n\nFirst, let's look at what would happen in light of the principles discussed above, if the loophole did not exist.\n\nAlice buys the stock when it is worth $10 and dies when it is worth $100. `","pinned":false,"hidden":false,"mode":"ojs"},{"id":363,"value":"basisRealizationGraph({ name: \"Alice\", values: [10, 100] }, true, \"black\")","pinned":false,"hidden":false,"mode":"ojs"},{"id":366,"value":"md`Bob inherits the stock when it is worth $100. However, because Alice never paid any taxes on the stock while she held it, his basis in the stock is $10. `","pinned":false,"hidden":false,"mode":"ojs"},{"id":371,"value":"basisRealizationGraph({ name: \"Alice\", values: [10, 100] }, false, \"black\")","pinned":false,"hidden":false,"mode":"ojs"},{"id":375,"value":"basisRealizationGraph({ name: \"Bob\", values: [10, 100] }, true, \"black\")","pinned":false,"hidden":false,"mode":"ojs"},{"id":379,"value":"md`As before, Bob holds on to the stock for 5 years and then sells it at $150. \n\nBob's gain = $150 - $10 = $140. Bob pays taxes on his profits of $140. `","pinned":false,"hidden":false,"mode":"ojs"},{"id":382,"value":"basisRealizationGraph({ name: \"Alice\", values: [10, 100] }, false, \"black\")","pinned":false,"hidden":false,"mode":"ojs"},{"id":385,"value":"basisRealizationGraph({ name: \"Bob\", values: [10, 150] }, true, \"green\")","pinned":false,"hidden":false,"mode":"ojs"},{"id":195,"value":"html`However, that's not what happens when property is inherited. As the tax code explains:

\n\n

\n26 U.S. Code § 1014. Basis of property acquired from a decedent 
\n(a) In general Except as otherwise provided in this section, the basis of property in the hands of a person acquiring the property from a decedent or to whom the property passed from a decedent shall, if not sold, exchanged, or otherwise disposed of before the decedent’s death by such person, be— 
\n(1) the fair market value of the property at the date of the decedent’s death...\n

\n

\n

`","pinned":false,"hidden":false,"mode":"ojs"},{"id":355,"value":"md`What does that mean in English? \n\nIt means that when Alice dies and leaves her stock to Bob, Bob's basis in the stock is $100, not $10.`","pinned":false,"hidden":false,"mode":"ojs"},{"id":253,"value":"basisRealizationGraph({ name: \"Alice\", values: [10, 100] }, false, \"black\")","pinned":false,"hidden":false,"mode":"ojs"},{"id":256,"value":"basisRealizationGraph({ name: \"Bob\", values: [100] }, true, \"black\")","pinned":false,"hidden":false,"mode":"ojs"},{"id":260,"value":"md`The gain in the stock from $10 to $100 is not taxed!\n\nLet's see what happens when Bob sells the stock for $150.`","pinned":false,"hidden":false,"mode":"ojs"},{"id":265,"value":"basisRealizationGraph({ name: \"Alice\", values: [10, 100] }, false, \"black\")","pinned":false,"hidden":false,"mode":"ojs"},{"id":267,"value":"basisRealizationGraph({ name: \"Bob\", values: [100, 150] })","pinned":false,"hidden":false,"mode":"ojs"},{"id":269,"value":"md`Bob's gain = $150 - $100 = $50. Bob will pay taxes on only $50.\n\nThe stock increased in value from $10 to $150, but only the gain from $100 to $150 is taxed.\n\nThis is what 26 U.S. Code § 1014 says in many more words.`","pinned":false,"hidden":false,"mode":"ojs"},{"id":277,"value":"html`

\n26 U.S. Code § 1014. Basis of property acquired from a decedent 
\n(a) In general Except as otherwise provided in this section, \nUsually, \nthe basis of \n property in the hands of a person acquiring the property from a decedent or to whom the property passed from a decedent shall, if not sold, exchanged, or otherwise disposed of before the decedent’s death by such person, be— \ninherited property is 
\n
\n(1) the fair market value of the property at the date of the decedent’s death...\n

`","pinned":false,"hidden":false,"mode":"ojs"},{"id":298,"value":"$31","pinned":false,"hidden":false,"mode":"ojs"},{"id":309,"value":"md`_Disclaimer/Warning_: This is not tax advice. Do not use it as tax advice.`","pinned":false,"hidden":false,"mode":"ojs"},{"id":26,"value":"md`## Code\n\nBelow is the code used to create the above charts.`","pinned":false,"hidden":false,"mode":"ojs"},{"id":28,"value":"d3 = require(\"d3@5\")","pinned":false,"hidden":false,"mode":"ojs"},{"id":30,"value":"$32","pinned":false,"hidden":false,"mode":"ojs"},{"id":37,"value":"margin = ({ top: 20, right: 30, bottom: 30, left: 40 })","pinned":false,"hidden":false,"mode":"ojs"},{"id":43,"value":"height = 100","pinned":false,"hidden":false,"mode":"ojs"},{"id":285,"value":"html`\n\n`","pinned":false,"hidden":false,"mode":"ojs"}],"files":"$W33","stdlib":"1","titling":"auto"}