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Christopher Phelps
Christopher Phelps, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 2710
Experience:  CPA, CFP, PFS, Tax Practitioner 21 Years, Member AICPA/CSCPA Tax/Financial Planning Committee Member
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Customer Question

I received stocks and bonds from my grandfather's estate, do I have have add the complete amount of the stocks and bonds to my taxable income?
Submitted: 11 years ago.
Category: Tax
Expert:  Christopher Phelps replied 11 years ago.

An estate tax return is required to be filed if the value of the decedents assets is in excess of $1,500,000 (for decedents who died in 2004 or 2005). Estate tax may be due on the value of the net estate (estate assets minus liabilities and expenses) in excess of the $1,500,000.


Beneficiaries who inherit assets from a decedent are not liable for any Federal inheritance or estate tax (unless the decedents estate neglects to pay estate tax due in which case the IRS may attach your inheritance). However, if any of the assets you received would have been subject to income tax to the decedent, then you will be subject to income tax as well. Assets such as IRA accounts and pensions inherited are taxable to the beneficiary when withdrawn.


So the answer to your question is no, you do not have to add the value of the assets you inherited to your income tax return as income received, unless you inherited an IRA or pension account and you made a taxable distribution from that account.


With respect to the stocks and bonds received, you tax cost basis will be the value for each asset reported on your grandfathers estate tax return (Form 706), or if no estate tax return was filed then its fair market value as of the date of death. You are also automatically presumed to have held the asset for more then one year entitling you to long-term capital gains treatment (i.e. max tax rate of 15%) should you sell one of the stocks or bonds. Thus, you will only be subject to tax on the post-death appreciation in the value.

Customer: replied 11 years ago.
Reply to Christopher Phelps's Post: Chris,

Thank you for your reply. Let me elaborate a little more to see what I should do. My grandfather passed away and my father was left the stocks/bonds and then distributed them among my brothers and sisters. My father filed and payed the taxes on the estate. When I filed my takes I had a professional do them and she filed a schedule D according to what was on my 1099 along with a schedule e. The IRS is now saying that I did the return wrong and that "the gross sale proceeds are treated as net capital gain because it has not been established that you had a cost basis in such capital items" That the capital gain which is the entire value of the stocks/bonds I inherited are part of my gross income. This obviously bumps up my taxable income leaving my to pay a lot of money? Any advice?
Expert:  Christopher Phelps replied 11 years ago.

Your situation is a little different then you first indicated. As I understand it your Father inherited the stocks and bonds from your grandfather. Your Father then passed the stocks and bonds on to you (or at least a portion of them).


Technically, your Father "gifted" you the stocks and bonds. Accordingly, if the total value of his "gift" to you exceeded $11,000, then he is required to file a gift tax return (Form 709). You assume his cost basis and holding period in the stocks and bonds. Based on what you are telling me your Father's cost basis will likely be the fair market value of the stocks and bonds on the date of your Grandfathers death (and thus your Father's cost basis is your cost basis). Also, your holding period will be automatically considered as long-term, thus allowing you to use capital gains tax rates (i.e maximum of 15%).


What it sounds like is that your "tax professional" filled out the schedule D wrong and did not include any cost basis information. He/she apparently did not report the sale transactions of the inherited stock and bond positions.


You need to establish what the fair market value of each stock and bond position your Father inherited (as of the date or your Grandfathers death) and then gave to you. Then you can either go see another professional to correct you return and respond to the IRS notice you received, or you can respond to the IRS notice yourself.


If you respond to the notice yourself, you need to give them a corrected schedule D that shows both the proceeds from the sale of the inherited/gifted stocks and bonds as well as the cost basis (i.e. the FMV as of date of death). The difference between the sales proceeds and cost basis will be your reportable gain or loss.


You also should gather documentation showing how the stocks and bonds came to you from your grandfather through your Father. Gather up brokerage statements, estate tax returns (if any were filed for your Grandfather) and your Fathers gift tax returns (he may need to have these prepared if they have not been done).


I really recommend you go see a CPA to get this handled. Do it immediately as you are probably running out of time to respond.

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