Transcripts

Kevin McCormally's Tax Tips-Estate Taxes

KEVIN MCCORMALLY, EDITORIAL DIR., "KIPLINGER`S PERSONAL FINANCE": One of the most complicated things about doing a tax return is figuring the tax basis of stocks and bonds you sold the previous year. You have to know the basis to figure the gain or loss. Usually, basis begins with what you paid for the property. But what if you didn`t buy it? What if you inherited it from someone else? How on earth are you supposed to know what they paid for it?

Fortunately, you don`t have to. You see, when you inherit property, your basis generally becomes the asset`s value the date the previous owner died. All appreciation up to that point is tax-free. This rule not only saves you the hassle of plowing through the paperwork, it can also save you a bundle if you sold assets that you had inherited.

Here`s a quick example. Let`s say your father bought a block of stock for $5,000 many years ago and it was worth $50,000 when he died and left it to you. Your basis is stepped up to $50,000. If you sold the stock for $55,000, you owe tax on just $5,000 of gain. If you sold for $40,000, you pocket $40,000 tax-free and you get to deduct a $10,000 loss. This also works for assets owned jointly by married couples, whether it`s stocks or a vacation cottage. When one spouse dies, at least half the basis is stepped up. In community property states, in fact, the full basis can be.

Unfortunately, this step up in basis doesn`t work for all inherited property. If someone leaves you a 401(k), regular IRA or annuity, you will be taxed on the money as you withdraw it. But if you sold inherited property last year, be sure you get your share of this multi-billion dollar tax break. I`m Kevin McCormally.