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The Sensible Taxation and Equity Promotion (STEP) Act 

Sensible Taxation and Equity Promotion (STEP) Act

What is the STEP Act?

Several United States Senators, including Bernie Sanders and Elizabeth Warren, have proposed a bill, called the Sensible Taxation and Equity Promoted (STEP) Act.   

What Does the STEP Act Do?

STEP Act would allow individuals to exclude up to $1 million in unrealized capital gains from tax, which are the potential profits from an asset, as well as to pay the tax in installments over a 15-year period for capital gains that apply to any illiquid asset like a farm or business. See below for further information on how illiquid assets are affected. 

An Example to Help Further Explain:

To better understand how the STEP Act works, here is an example:  if someone dies holding $7 million in property for which they paid $4 million for, they would only pay taxes on $1 million of that $2 million gain.

Additionally, if someone dies holding $3 million in property assets for which they paid $2 million for, none of that $1 million gain would be taxable. 

Would The STEP Act Affect Retirement?

Currently, it seems that assets held in a retirement account would not be subject to capital gain taxes under this Act. 

Would The STEP Act Affect Gifts and Bequests?

Currently, it seems that gifts and bequests would be exempt from the capital gain taxes under this Act. 

How does STEP Act Work During an Individuals Lifetime?

During an individual’s lifetime, any completed transfer to a trust or to any individual other than a spouse will allow for the first $100,000 of cumulative gain to be tax free. However, any excess will be subject to a transfer tax after the first $100,000. 

Second, this Act will eliminate the ability to use trusts to transfer property or other assets that are sold. Non-grantor trusts, which is a trust where the grantor retains certain powers over the trust, would have to report gain on all of their appreciated assets every 21 years. 

Third, this Act would require trusts more than $1 million of assets or more than $20,000 of gross income to provide additional information to the IRS, including a balance sheet, income statement, and list all trustees, grantors, and beneficiaries. 

What Transfers Are Exempt from The STEP Act?

Items transferred to a spouses, charitable trusts, qualified disability trusts, charity, and cemetery trusts are exempt from the tax. 

Is Illiquid Property Affected by STEP Act?

Illiquid property is property that is not easily sold. Common examples of illiquid property include businesses and farms. For STEP Act purposes, transfers of illiquid property would be affected. Thus, owners of such property would be allowed to pay the tax over a 15-year period. It would be interest only for up to 5 years and then 10 equal payments for the remaining 10 years. However, selling the property would require payment in full. 

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