The old saying is the best laid plans of mice and men so often seem to go wrong. When it comes to the government, this is a statement that is used the vast majority of the time since the bumbling of politicians creates some situations that are simply head shakers. This is exactly the case with the step up basis in estate tax for 2010.

This can get confusing, so let’s start off with the basics. The step up basis is simply the value of some asset at a date in time from which a gain is calculated. Let’s say I buy a share of Microsoft in 1990 [I wish!] and I sell it today. I would pay rather large capital gains taxes on the gain in value of that share of stock between 1990 and 2010.

The passing of an asset from a deceased person to their heirs triggers a bit of a different calculation. Let’s assume the same situation as above. Instead of selling the stock in 2010, I die after being attacked by a bear [might as well make it exciting] in 2002. At that point, my stock is transferred to my daughter per my written will. This transfer constitutes a taxable event. Historically, she would pay tax on the gain from the date of my death till she sold the item. The use of my date of death allows her to “step up” the value of the stock instead of pay taxes on all the gains since 1990.

The Bush tax cuts were designed to reduce a number of taxes, but they went a step farther with the estate tax. They were designed to phase it out. In fact, there is no estate tax in 2010. That is nice and all, but the problem is the step up basis for capital gains above is now gone for the year. Instead of paying capital gains on the increase in value from the date of my death, she will have to pay them on the gains from 1990. That is a huge difference and constitutes a massive amount of money going out of my family and to the government. What did the government do for this money? Nothing, I just died!

Is there anything one can do about this mess with the step up basis? Unfortunately, there is not. It is simply another example of the government creating a mess with the best of intentions.

The common legal definition of the term gift is different than the tax application of the term gift. Employers sometimes give an employee a gift to reward past performance or as an incentive for future performances. These sorts of gifts are not tax-deductible as the definition applies to gifts given in respect or admiration, charity or similar impulses. A “de minimis” fringe benefit is a gift given to an employee that is not subject to income tax, but is a tax deduction for business purposes. The Internal Revenue Service definition of a “de minimis” fringe benefit is any property or service which has a value so small that it makes accounting for it unreasonable or administratively impractical after taking into account the frequency with which similar fringes are provided by the employer to employees.

There is the ham, turkey, and gift basket rule that provides for the giving of non-cash holiday gifts. In essence, the IRS allows, flowers, gift baskets, turkeys, hams, and any gift of low fair market value to be given without a tax consequence to the employees. The IRS does not set a specific monetary limit to low market value. The “de minimis” fringe benefit also allows employers to deduct the cost of occasional parties and event tickets without a tax liability to the employees attending. This also goes for picnics, birthdays and the like. The Internal Revenue Service also allows for sporting event and theater tickets to be handed out without counting as an employee’s income. The stipulation on gifts of cash is that they must be reported as part of the employees’ income along with any gifts easily exchanged for cash like stock, bonds, Treasury note, etc. Such gifts would require the employer to pay additional payroll taxes and the employee to treat these gifts as income.