When you inherit stocks after a death, you don’t usually have to pay taxes on them until they are sold. However, if the decedent lived in a state with an inheritance tax and you were not their child or grandchild, you may end up liquidating stocks after the death to pay the inheritance taxes.
Depending upon the decedent's state, you may or may not have to pay an inheritance tax on stocks after a death.
Capital Gains on Estate Assets
If you inherit stock, you will not have to pay capital gains taxes until you sell your shares. If you are liquidating stocks after a death, you may owe capital gains, but the amount may be relatively insignificant if you sell them soon after receiving them as part of your inheritance distribution. That’s because a stock’s basis is its value on the day of the decedent’s death. If the stock happened to make a lot of money in a relatively short time since you inherited it, you’ll pay short-term capital gains taxes at your marginal tax rate. Figure out the taxes owed by subtracting the stock’s value on the day of the decedent’s death, which is the basis, from the amount at which you sold it. The difference is your gain or loss. If you held the stock for less than a year, you pay the short-term capital gains tax. If you held the stock more than one year, you’ll pay long-term capital gains tax, which is a lower rate.
State Inheritance and Estate Taxes
Because the federal exemption is so high, most people will not have to pay any taxes on inherited stocks, and most estates will not to have to file estate taxes. Even if an estate doesn’t have to pay federal estate taxes, it may prove subject to estate taxes imposed by the state in which the decedent resided. The same holds true for inheritance taxes, which are paid for by the recipient. Currently, 12 states, along with the District of Columbia, impose estate taxes on death, and six states impose an inheritance tax. If the decedent lived in Maryland, expect an estate and an inheritance tax. At 20 percent, Washington has the country’s highest estate tax, while Nebraska holds that dubious distinction for inheritance tax, at 16 percent. However, inheritance taxes are usually imposed on beneficiaries who are not the decedent’s direct descendants, such as children or grandchildren. When a decedent leaves stock or other assets to another relative, including a sibling, niece or nephew, or to someone outside of the family other than a non-profit organization, that’s when inheritance taxes generally kick in. In some states, including Oregon and Massachusetts, estate taxes are imposed on those estate worth $1 million and up.
The 12 states with estate taxes as of 2018 are: Connecticut, Hawaii, Illinois, Maine, Maryland, Massachusetts, Minnesota, New York, Oregon, Rhode Island, Vermont and Washington. The six states with an inheritance tax as of 2018 are: Iowa, Kentucky, Maryland, Nebraska, New Jersey and Pennsylvania.
Estate Tax Exemption in 2017 and 2018
For 2017, the estate tax exemption is $5.49 million per person. The long-term capital gains rate is zero for those in the 10 to 15 percent tax bracket, 15 percent for most tax brackets above 15 percent up to 35 percent, and 20 percent for those in the 39.5 percent bracket.
The Tax Cuts and Jobs Act, signed into law on Dec. 22, 2017, raises the federal estate tax exemption to $11.2 million per person until the law expires on Dec. 31, 2025. The short-term capital gains rate, for assets held less than one year, are 10 percent, 12 percent, 22 percent, 24 percent, 32 percent, 35 percent or 37 percent, based on your income bracket. The long-term capital gains rate remains the same as in 2017, but the brackets have changed. The zero tax bracket holds true for single filers with an adjusted gross income of up to $38,600 for single filers and up to $77,200 for those married and filing jointly; 15 percent for single filers with an adjusted gross income of $38,601 and married filers with an adjusted gross income of $77,201, and 20 percent for single filers with an adjusted gross income of $425,801 and up and married filers with an adjusted gross income of $479,001.
A graduate of New York University, Jane Meggitt's work has appeared in dozens of publications, including PocketSense, Financial Advisor, Sapling, nj.com and The Nest.