The passing of a loved one is one of life's transitions. Losing a parent can be especially difficult. Receiving an inheritance can prove comforting, evidence as it is that the decedent thought to provide for your future. But it also can raise issues of accounting that can prove alienating or even confusing. Among these issues is taxation of stock after death. If you are an inexperienced investor, or overcome with grief, consult a tax professional before making any decisions relative to selling stock.
Basis is a term of valuation that is applied to stocks. When a person buys stock, for example, the basis is the amount he paid for it. When one inherits stock, on the other hand, the basis is generally the market value on the date of death. For example, if your uncle passed away on July 11th and left shares of stock to you, the basis would be the value of the stock as of market close on July 11th. In cases in which estate tax is a significant issue, the estate executor can choose an alternate stock valuation date of six months after the date of death.
When a person buys stock, he may elect to hold it for a short or long term. However, when one inherits stock, its status is considered long-term no matter how long the decedent held the investment. This is significant because long-term investments may be taxed at a lower rate than short-term holdings.
Capital Gains Tax Rate
Capital gains tax is a federal tax applied to earnings on investments. Not surprisingly, many investors do their best to minimize or avoid it. For example, investing in an IRA allows you to sidestep capital gains tax. Short-term capital gains are taxed as ordinary income, which rate tops out at 35 percent as of this writing. In most cases, the maximum long-term capital gains rate is 15 percent. If your income puts you in the 10 or 15 percent income tax bracket, you may not be taxed at all for a gain on the sale of inherited stock. (If one sells small business stock to which a gain exclusion rule applies, the rate rises to 28 percent.) As inherited stock is automatically considered a long-term investment -- earnings are exposed only to the lower tax rate.
Property inherited from a decedent is not considered income and therefore is not subject to income tax. However, selling inherited stock may expose you to capital gains tax.
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