If you've inherited some stocks and cashed them out, the basis for figuring out any tax consequences is the fair market value of the securities on the date of the decedent's death. Fortunately for the estate's executor and any beneficiaries, there is no need to rummage through the decedent's files to determine the original cost of securities.
Taxes depend on your cash basis for the inherited stocks. The estate executor should provide you with the fair market value as of the decedent's death, which may not be the value of the stocks when transferred into your name. No matter how little the decedent may have paid for the stocks, if he held them for years without selling, the basis at the time of death "steps up" to the present market value. Had the decedent sold long-held stocks before his death, taxes would be based on the original purchase price. When inherited, any tax the original owner may have owed is forgiven by the Internal Revenue Service.
If you cashed in inherited stocks, taxes are only due on any appreciation since the decedent's death date. For example, if you were left stock shares worth $10,000 on the decedent's day of death, and you sell these shares for $11,000, the taxable amount on capital gains is $1,000. If you sell the shares for $9,000, you can claim the $1,000 as a tax loss for federal income tax purposes.
In certain cases, you may find that you must cash in the inherited stocks to pay inheritance taxes. The cash basis for the stock sale remains the same. Whether or not you owe inheritance taxes depends on the state in which the decedent resided, or your relationship to the decedent. Any estate tax owed must be paid before distributions are made to beneficiaries, but inheritance taxes are your responsibility. Many states have abolished the inheritance tax, or impose it only on non-lineal descendants or beneficiaries without blood ties to the decedent. The executor or the estate's attorney can advise about whether inheritance taxes are owed.
A special tax situation may affect beneficiaries inheriting stocks from decedents who died in 2010. Under IRS rules in place for that year, the cash basis starting point is either the fair market value on the date of the decedent's death or the decedent's actual basis. This limited-time rule affects larger estates, because there was no federal tax imposed on the estates of those dying that year, no matter how large the estate. This basis may result in an increase in capital gains taxes when inherited stocks are sold. Consult the executor or the estate's attorney if the 2010 regulations affect your inheritance.
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