While you probably hear the term ‘basis’ regularly during the tax planning process, you might not fully understand what it means. Understanding the basics is critical of making the most of your money every year, on top of working with skilled professionals like Miles Tax Advisory.

Basis 101

In general, your basis is the amount that you paid for an asset. The IRS defines any capital gain or loss as the difference between the amount you paid (basis) and the amount that you get from selling the asset. If you sell something for more than the basis, you will be required to pay taxes on the gain.

How Does Basis Work?

For example, imagine that you purchased a stock decades ago at $100 a share and the value today has ballooned to $500 a share. If you decide to sell the stock, you would be required to pay taxes on that $400 for every share that you sell. The amount that they are taxed will vary depending on when they were purchased. Long-term gains are things that you owned for over a year and are taxed between 0% and 23.8%. Short-term gains are things you held less than a year and taxed as normal income.

Capital Gains Taxes

Because the amount of tax you pay varies so significantly, it’s critical to understand when the taxation amount fluctuates. The government offers a break to people who are heirs and inherit appreciated stock and assets. The cost basis of the asset, upon inheritance, is “stepped up to value” on the date of death. One common case of this happens with homes. If a home was purchased for $150,000 a decade ago and the current value is $325,000, you would think that you would need to pay that difference, right? Not necessarily! Instead, the government does not require that to be paid if the home is sold. Instead, the $150,000 basis would be changed to $325,000. If you sell the home for more than that, you would pay the capital gains tax.

Exceptions to the Rule

In rare cases when assets are owned jointly and one spouse passes away, a partial increase in basis could apply. In those cases, the new basis would be the fair market value on the date of the spouse’s death added to the original basis and divided by two.

Estate Planning with Miles Tax Advisory

If you are ready to explore estate planning or plan to minimize your tax liability this year, we are always here to assist you!