Are You Concerned About Paying Too Much Tax on Your Inherited Stock Sales?

Have you recently inherited assets and are wondering how to preserve your inheritance in the face of complex tax issues?  Heirs need to be aware of a few estate tax implications associated with inheritance that can work in their favor.

We’ve helped countless clients sort through estate tax consequences. They frequently ask, “Do I receive a step up in basis in inherited assets, even if no federal or estate inheritance return is required to be filed?” We have good news for you: yes, you do!

In general, the heirs of a decedent’s estate receive a basis in inherited stocks equal to the value of the stock on the decedent’s date of death. For example, if Aunt Beatrice bought IBM stock in 1962 for $100 and it is worth $1 million at her death, the basis is stepped up to $1 million in the hands of her heirs and all of that gain escapes income taxation forever. Moreover, sales of inherited stock will automatically receive long term capital gain treatment regardless of how soon after the date of death the assets are sold, or how recently shares were purchased prior to date of death. Essentially, you reap benefits from the basis boost and only recognize gains on the amount the stock appreciates since the time of death.

How do I determine the date of death value?

If a federal estate tax return was filed, then consult the executor to determine your basis in any inherited assets, as there are exceptions to the general rule such as possible alternate valuation dates. However, if an estate tax return was not filed and you are trying to determine your basis on your own, you can use the High/Low average per share method calculated on the date of death. This information is easily accessible via any trusted stock site. Once you have determined the initial cost basis per share, you must then cycle forward and update your basis by looking at corporate actions, reorganizations, splits, return of basis payments, etc. since the date you inherited the shares.

Making sure that your tax returns reflect the correct basis in sales of inherited stocks

Whether or not an inheritance return is filed for the decedent, it is possible that your broker statements and annual tax information statements do not reflect the stepped-up basis in inherited stocks. If basis is reported too low your capital gains could be overstated, resulting in a higher tax bill. Generally, your broker statements will be accurate with respect to stock purchases you made with that firm. Nonetheless, when assets are transferred into your account from an outside account or you change brokers, the basis information is only as good as the information that is provided at the time of a transfer. Therefore, it is important to review the basis for all of your stocks periodically, but it is imperative to review in the year of sale.

If you think that your cost basis was reported incorrectly on prior year tax returns, you can still amend up to three years of prior filings in order make corrections (tax years 2011, 2012, and 2013 are currently open to amend). You have three years from the due date of the return (unless you filed an extension, in which case you have three years from the filing date) or two years after the date you paid the tax, whichever is later.

If you have immediate questions or would like more information, please contact us.