Tax on Inherited Stock

by Alexis Lawrence

When you inherit stock, you do not have to pay any taxes on the stock as long as you keep the stock as shares. However, once you cash in the stock, you do have to pay taxes on the stock as you would any other income source. Stock taxes, however, do not generally carry the same tax burden as other income.

The Exception

Even if you keep inherited stock as shares and do not receive payment from selling the stock, you still have a tax liability if you receive dividends. If you receive any cash dividends from your shares of inherited stock in a tax year, you must declare those dividends on your tax return. Unlike profits made from selling a stock, dividends do count as “income” for tax purposes, and, therefore, are taxed at your normal income tax rate, as determined by your adjusted gross income for the year.

Selling Stock

If you sell inherited stock, you must pay taxes on all of the profits from that stock received in the same tax year in which you sell the stock. These profits are subject to capital gains tax. A capital gain is any earning that you make off of an investment, including stock profits. Unlike dividends, which are treated like income for tax purposes, the capital gains from a stock sale must be declared separately on your tax return.

Declaring Capital Gains

The separation of capital gains from standard income is a positive separation as far as your tax liability is concerned. The maximum tax rate for a capital gain from stock, as of the time of publication, is 15 percent, far below many income tax rates. To declare capital gains on your tax return, you need to fill out Schedule D of your 1040, which is labeled “Capital Gains and Losses.” This section of the tax return corresponds to line item 13 on the main 1040 form.

Determining Tax Profits

When you inherit a stock, the value of the stock on the date of the death of the person from whom you inherited that stock determines your tax liability. Even if the original owner purchased the stock for $300 and the stock value is $1000 when you receive the stock, you do not pay tax on the increase. If you sell the stock that was worth $1000 when you inherited it for $1500 at a later date, you pay taxes on the $500 that it gained in value during your ownership of the stock. Any earnings during the original owner's life are not taxed.

About the Author

Alexis Lawrence is a freelance writer, filmmaker and photographer with extensive experience in digital video, book publishing and graphic design. An avid traveler, Lawrence has visited at least 10 cities on each inhabitable continent. She has attended several universities and holds a Bachelor of Science in English.