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Faizan
If you're the beneficiary of inherited shares of stock, you can keep them, sell them, reinvest the dividends or have these proceeds regularly sent to you. Once the shares are transferred to you, you may either maintain the inherited account in your own name or transfer the shares to your own brokerage account. If the inherited stock involves an individual retirement account, or IRA, the rules depend on your relationship to the deceased, original owner.
Stock Tax Basis
It generally does not matter if the person who left you the securities or stock mutual fund shares held them for a long time, bought additional shares and reinvested the dividends and capital gains. You don't have to go digging through years of financial records to figure out the cost basis of your inherited stock. Your cost basis is usually the value of the shares on the day of the original owner's death. One exception is if the executor of a large estate chooses to use a date six months after the original owner's death for tax purposes. In this case, the value of the stock at six months after the date of death is your cost basis. The executor can tell you which date was used.
Capital Gains and Losses
If you decide to sell your stock after you inherit them, you could owe capital gains tax or you could claim a capital loss on your income taxes, depending on the cost basis and the stock value at the time of sale. If the shares went above the cost basis at the time you sell, you might owe capital gains tax on that difference. For example, if the cost basis of the shares is $10,000, and they were worth $12,000 on the date you sold them, you might owe capital gains taxes on the $2,000. If the shares lost money and were worth only $8,000 when sold, you could claim a capital loss.
Inheriting Spousal IRAs
If you inherit an IRA invested in stocks or stock mutual fund shares from your spouse, a different set of Internal Revenue Service rules apply. You can treat it as your own IRA, or roll the funds over into your own IRA account or qualified employer-sponsored retirement plan. If you decide to treat your late spouse's account as your own, you can make allowable IRA contributions into it. You won't owe taxes on an inherited IRA until you start taking distributions.
Non-spousal Inherited IRAs
If the person who left you the inherited IRA stock was not your spouse, you have more limited options. You can't roll the account over into your own name. Instead, you can transfer the funds into a specifically-titled inherited IRA account. The account title should read along the lines of "John Doe, deceased 1/2/14, for the benefit of Jane Doe, beneficiary." If the deceased person was already taking minimum required distributions from the account or was at least age 70 1/2 at the time of death, you must take these MRDs based either on your IRS life expectancy table or that of the original owner. If the person was under the age of 70 1/2 at the time of death and hadn't started taking MRDs, you can take advantage of the IRS's five-year rule. You won't owe penalties on the inherited IRA as long as you withdraw the funds and close the account by the end of the fifth year after the late owner's death.
Stock Tax Basis
It generally does not matter if the person who left you the securities or stock mutual fund shares held them for a long time, bought additional shares and reinvested the dividends and capital gains. You don't have to go digging through years of financial records to figure out the cost basis of your inherited stock. Your cost basis is usually the value of the shares on the day of the original owner's death. One exception is if the executor of a large estate chooses to use a date six months after the original owner's death for tax purposes. In this case, the value of the stock at six months after the date of death is your cost basis. The executor can tell you which date was used.
Capital Gains and Losses
If you decide to sell your stock after you inherit them, you could owe capital gains tax or you could claim a capital loss on your income taxes, depending on the cost basis and the stock value at the time of sale. If the shares went above the cost basis at the time you sell, you might owe capital gains tax on that difference. For example, if the cost basis of the shares is $10,000, and they were worth $12,000 on the date you sold them, you might owe capital gains taxes on the $2,000. If the shares lost money and were worth only $8,000 when sold, you could claim a capital loss.
Inheriting Spousal IRAs
If you inherit an IRA invested in stocks or stock mutual fund shares from your spouse, a different set of Internal Revenue Service rules apply. You can treat it as your own IRA, or roll the funds over into your own IRA account or qualified employer-sponsored retirement plan. If you decide to treat your late spouse's account as your own, you can make allowable IRA contributions into it. You won't owe taxes on an inherited IRA until you start taking distributions.
Non-spousal Inherited IRAs
If the person who left you the inherited IRA stock was not your spouse, you have more limited options. You can't roll the account over into your own name. Instead, you can transfer the funds into a specifically-titled inherited IRA account. The account title should read along the lines of "John Doe, deceased 1/2/14, for the benefit of Jane Doe, beneficiary." If the deceased person was already taking minimum required distributions from the account or was at least age 70 1/2 at the time of death, you must take these MRDs based either on your IRS life expectancy table or that of the original owner. If the person was under the age of 70 1/2 at the time of death and hadn't started taking MRDs, you can take advantage of the IRS's five-year rule. You won't owe penalties on the inherited IRA as long as you withdraw the funds and close the account by the end of the fifth year after the late owner's death.
Posted in: Estate Laws
