My uncle died a few months ago and left me some stock he purchased in the 1970s. I’d like to sell some of it, but I am worried about taxes. If I sell it, will I be taxed on the increase in value since he bought it or on the gains since he passed away?
Stock is simply not a “normal” asset and the tax treatment can get pretty far from normal too. If you’ve just inherited stock or if you’re set to leave behind stock to your heirs, then it is well worth your time to get an idea just how far from normal this tax treatment can get and what it can mean in the context of your overall estate plan.
There a volumes to read on the topic of inherited stock, but thankfully Kiplinger posted a handy little note and Q&A on the topic last month with “The Tax Hit on Inherited Stock.” Essentially, stock is a partial ownership of something greater (a company) and the value of the stock is based on the company which is based on market which is based on when you buy and sell or how long you own the stock and/or who held the stock at each juncture. In other words, there are more than a few variables, as you well know, and these variables are what can make for a tax headache.
The tax code settles this complexity with a simple(r) equation of sale less basis equals taxable amount. “Basis” is the value during the point at which the present owner acquired the stock, which is the operative concept in inheritance. Stock basis will be measured at the juncture that it is inherited. Unpack that: a parent buys stock in 1990 and then leaves it to their heirs in 2014. While owned by the parents the stock jumps from $500 to $30,000 in the intervening 24 years. Thereafter, the heirs inherit the stock and only measure their taxable amount (sale less basis) on that $30,000 high point of 24 years of appreciation. Accordingly, a sale by the heirs down the line at $32,000 means that only that last $2,000 is taxable.
Again there is much more to be said and not all stock or stock taxation is so easy. And then again, not everyone inherits stock by bequest and the rules change. The big picture here is that when thinking about saving the inheritance from taxation it is not just the estate tax or the gift tax that you have to worry about, and it’s not just the settlor of the estate who pays them. Set up your assets inefficiently and your heirs can get stuck with a tax bill you didn’t think about. So think about stocks and think about the capital gains tax, and, more importantly, plan for them.
Reference: Kiplinger (May 1, 2014) “The Tax Hit on Inherited Stock”