When someone you care about dies, tax law is likely to be one of the last things on your mind. However, when you inherit property after someone dies, your basis for the inherited property, such as stocks, get stepped up to the fair market value for the stock as of the date of death. To minimize your taxes when you sell inherited stock, you need to know the date of death cost basis rules.
Usually, you use the average of the high and low price of the stock on the date of death to calculate your basis for inherited stock.
Tax Basis of Inherited Stock
To determine the basis of your inherited stock, you usually need to know what it was worth on the day the decedent died. But, the date of death valuation isn’t just the closing price of the stock that day. Instead, to calculate the value of the stock on the date of death, take the average of the highest selling price and the lowest selling price of the stock on that date. For example, say you inherited shares of a company from someone who died on June 1. If the stock traded at a high of $55 and a low of $53, add $55 and $53 to get $108 and divide by 2 to find the basis in your inherited stock is $54 per share.
Alternate Valuation Date
In limited circumstances, an estate can elect to use an alternate valuation date for calculating the basis of inherited stock. If the executor of the estate elects, all of the assets of the estate can be valued six months after the date of death instead of on the date of death. However, this option is only available if it will reduce the amount of estate tax due. If no estate tax is due, there isn’t an option to use the alternate valuation date because you can’t reduce the estate tax due below zero.
2019 Federal Estate Tax
The basis rules for inherited stock haven’t changed for the 2019 tax year. However, in 2019, the federal estate tax exemption increased to to $11.4 million per person ($22.8 million per married couple), so very few people will ever have an estate large enough to owe estate taxes. As a result, even fewer people will use the alternate valuation date for determining the stepped up basis.
2018 Estate Tax Exemption
In 2018, the estate tax exemption was $11.18 million per person, which more than doubled the 2017 amount of $5.49 million.
Based in the Kansas City area, Mike specializes in personal finance and business topics. He has been writing since 2009 and has been published by "Quicken," "TurboTax," and "The Motley Fool."