Transcripts

"Kevin McCormally's Tax Tips"- Stepping Up Tax Basis on Inheritance

SUSIE GHARIB: Well, just one day to go until the Federal tax filing deadline and many Americans are still scrambling to get their returns finished. Our "tax tips" are here to help with a last-minute tip that could save you money. Tonight, Kevin McCormally, editorial director at "Kiplinger's Personal Finance," looks at a $52 billion tax saver.

KEVIN MCCORMALLY, EDITORIAL DIR., KIPLINGER'S PERSONAL FINANCE: Tonight, I want to talk about a tax break that the will save taxpayers $52 billion on 2007 tax returns. It's a break you'll hear a lot about next year, when Congress gets serious about reforming the estate tax because some lawmakers want to eliminate it in the future. I'm talking about the provision in the law that allows people who inherit assets -- stocks, bonds, real estate, -- to step up the tax basis to the asset's value on the day their benefactor died.

Here's a simple example. Let's say your Uncle Joe invested $10,000 in a stock years ago and that the shares were worth $100,000 when he died and left them to you. Your tax basis is $100,000 and you owe tax only if you sell for more than that amount. This stepped-up basis rule wipes out the tax on the $90,000 of appreciation that built up while Uncle Joe was alive. When assets are jointly owned, the way husbands and wives often own investments, at least half the basis is stepped up on the death of the first owner. So if Uncle Joe and Aunt Mary owned the stock jointly, Aunt Mary's basis would jump to $55,000 when Uncle Joe died, her half of the original $10,000 basis plus $50,000, which is the value of Joe's half of the investment on his death. In community property states, the full basis can be stepped up.

Now, the step-up doesn't apply to U.S. savings bonds or retirement accounts, like IRAs and 401(k)s, but if, during 2007, you sold assets that you had inherited, be sure you get your share of this multibillion-dollar break. And if you've already filed without stepping up your basis, file an amended return using form 1040x to take advantage of the step up retroactively. I'm Kevin McCormally.

Editor's Note: The calculation of Mary's tax basis in Kevin McCormally's second example has been corrected. It was incorrectly reported in the originally broadcast Tax Tip.