Capital Gains on Inherited Stock and Your Taxes

You've inherited some stock from a loved one, and you're not sure what to expect in terms of taxes. The good news is that you won't have to pay capital gains tax on the inherited stock, at least not immediately.

The IRS considers inherited stock to be a long-term capital asset, which means you can sell it at any time without incurring capital gains tax. This is because the deceased person's original cost basis is carried over to you, the beneficiary.

The original cost basis of the stock is the price the deceased person paid for it, plus any fees or commissions. This is an important number, as it will determine your capital gains tax liability if you decide to sell the stock.

For example, let's say your aunt inherited 100 shares of stock from your grandfather, who bought them for $1,000. If she sells the shares for $10,000, she won't owe any capital gains tax because the original cost basis was $1,000.

Biden's proposal on capital gains taxes aims to raise the maximum rate for households making over $1 million to 39.6 percent, up from 20 percent.

This increased rate would greatly impact those who inherit stocks or other assets, as they would have to pay capital gains taxes on them.

The Tax Foundation notes that eliminating the step-up in basis would increase federal revenue and encourage capital gains tax realization.

Combining the estate tax with the higher capital gains rate and the repeal of step-up in basis could bring total effective marginal rates as high as 61 percent.

Tax experts like Brad Sprong are advising clients to prepare for possible changes, and one way to do that is by making large gifts to loved ones now, rather than waiting.

Inherited stock can be a complex topic, but understanding the tax implications is key to making informed decisions. The tax bill on inherited stock is based on its value at the time of the original owner's death.

Stock is a partial ownership of a company, and its value is based on the company, which is influenced by market factors. The value of the stock can fluctuate over time, making it essential to consider the tax implications.

The tax code simplifies the complexity with a straightforward equation: sale less basis equals taxable amount. Basis is the value of the stock at the time the original owner acquired it.

For example, if a parent bought stock in 1990 for $500 and left it to their heirs in 2014, the heirs would inherit the stock at its value of $30,000. If the heirs then sold the stock for $32,000, they would only pay taxes on the $2,000 gain.

It's essential to consider the capital gains tax when inheriting stock. The federal long-term capital gains rate ranges from zero to almost 24 percent for higher wage earners.

To minimize the tax impact, you can utilize capital loss carry forwards or create a capital loss by selling losing investments in your taxable portfolio. You can also time the sale of the stocks over multiple years to spread out any tax liability.

Consulting with an accountant each year to get an idea of how much in capital gains you would realize can help you make informed decisions.

Biden's proposal on capital gains taxes would raise the maximum rate to 39.6 percent for households making over $1 million.

This means that heirs would have to pay capital gains taxes on stocks, which could greatly increase the tax burden on those who inherit stocks or other assets.

The Tax Foundation notes that eliminating the step-up in basis would increase federal revenue and encourage capital gains tax realization.

Combining the estate tax, the new higher capital gains rate, and the repeal of step-up in basis could bring total effective marginal rates as high as 61%.

Brad Sprong, a KPMG partner, advises clients to prepare for possible changes by making large gifts to loved ones now, rather than waiting, in case there's increased taxation on inheritances.