Just inheriting stock won't require you to file any federal tax forms, because the Internal Revenue Service only imposes an estate tax, not an inheritance tax. However, when you want to cash out some or all of the money by selling the inherited shares, you need to know your basis so you can pay the appropriate taxes.
Your New Basis
When you inherit any property, including stock, you get a new basis based on the value of the stock at the decedent's death. Your basis matters, because that determines how much of the proceeds of the sale of stock that is subject to taxes. It no longer matters how much the decedent paid to buy the stock. For example, if the stock was worth $2,000 when the decedent died, that's your basis, regardless of whether the decedent paid $1,200, in which case that $800 gain will never be taxed, or $3,000, in which case that $1,000 loss is never deductible.
Calculating Value at Death
To figure the value of common stocks at death, you're not allowed to simply use the closing price for the stocks for the day. Instead, you have to figure the price based on the average of the high and low value for the date of death. It gets more complicated if the decedent died on a day the markets weren't open: You must use the average of the high and low for the last day the markets were open before death and the high and low for the first day the markets were open after death.
When you eventually sell the inherited stocks, you must calculate your gains or losses so you can figure the tax impact. To do so, first figure your proceeds from the sale, which equals your selling price minus any transaction fees. Then, subtract your basis. If the result is positive, you have a taxable gain. If it's negative, you have a loss you can use to offset your other gains. For example, say your basis in an inherited stock is $2,000. If you sell it for $2,420 but pay a $10 commission, you have $410 of taxable gains.
No matter how long you hold the inherited shares before selling or how long the person you inherited them from held them before dying, you get to pay the lower long-term capital gains rates, which can save you a bundle. For example, as of 2014, if you fall in the 15 percent tax bracket or lower, you don't pay any taxes on your long-term capital gains. If you're in the 25 percent to 35 percent brackets, the rate is only 15 percent. Only if you're in the top 39.6 percent bracket do you pay the 20 percent rate.
Mark Kennan is a writer based in the Kansas City area, specializing in personal finance and business topics. He has been writing since 2009 and has been published by "Quicken," "TurboTax," and "The Motley Fool."