If you inherited stocks that have been through the probate process, you won’t owe capital gains tax until the day they are sold.
Cost Basis of Inherited Stock
When you inherit stocks, the cost basis is the value of the stocks on the day of the decedent’s death. The cost basis is usually referred to as an asset’s original value, as in the case of a house purchased for $300,000 and sold for $400,000. However, unless the deceased person kept excellent records, and the executor finds and has access to them, it is often very difficult to determine how much was paid for every share, along with dividends, over the years. The cost basis is thus “stepped up” to the value of the stocks on the day the owner died.
CGT on Inherited Shares
When you sell your inherited shares, your capital gains tax is based on the difference between the value of the stock on the day of the decedent’s death and the day you sold them. It is possible that the value may have declined over that period, in which case you would have a capital loss. Unlike stock you purchased and sold within a year, all inherited stock is considered a long-term capital gain when sold, and the amount you pay depends on your tax bracket. Report the sale of inherited stock on Schedule D Form 1040.
Estate Tax on Stocks 2018
There’s no estate tax on stocks per se, but stocks are taken into account as part of the estate’s total value. For 2018, the federal estate tax exemption is $11.18 million, so relatively few estates will have to pay the tax. As an heir, you don’t have to pay estate taxes, but if you live in a state with an inheritance tax, you may owe taxes on the inherited stock’s value. Currently, just six states impose an inheritance tax: Iowa, Kentucky, Maryland, Nebraska, New Jersey and Pennsylvania. Spouses are not usually charged inheritance tax, and many states also exempt the child of a decedent. If the decedent was a friend or most distant relative, expect to pay inheritance tax. Because of the Tax Cuts and Jobs Act, many people will find themselves in lower tax brackets, and thus will not have to pay capital gains tax. Rates on long-term capital gains for 2018 are 0, 15 and 20 percent, with single filers with an AGI of up to $38,700 and married couples filing jointly with an AGI of up to $77,200 paying zero capital taxes; those with an AGI of $38,601 through $425,800 for single filers and $77,201 through $479,000 for married couples filing jointly pay 15 percent in capital gains taxes and those with an AGI above those amounts pay 20 percent in capital gains taxes.
Estate Tax on Stocks 2017
The federal exemption on the estates of those dying in 2017 is $5.49 million, so while few estates must pay the estate tax, more must do so than if the decedent died in 2018. If the estate’s value is more than the exemption, it must pay the tax. That may reduce the amount of stock received by the heir if these assets must be sold to pay the tax, but the heir is not responsible for paying the estate tax. Rates on long-term capital gains for 2017 are 0 for those in the 10-or-15 percent tax bracket, or less than $35,350 for single filers and $70,700 if married filing jointly. The capital gains tax rate is 15 percent for taxpayers in the 25, 28, 33 and 35-percent tax brackets, but jumps to 20 percent for those in the 39.6 percent bracket. The latter starts at $418,400 for single filers and $470,700 for married couples filing jointly.
A graduate of New York University, Jane Meggitt's work has appeared in dozens of publications, including PocketSense, Zack's, Financial Advisor, nj.com, LegalZoom and The Nest.