When you inherit securities, such as stocks or bonds, it’s essential to understand the concept of cost basis. Cost basis is the original value of an asset for tax purposes, and it plays a significant role when you eventually sell those inherited securities.
Determining the cost basis for inherited securities can be a bit complex, but there are generally two methods used: stepped-up basis and carryover basis.
1. Stepped-Up Basis: This method adjusts the cost basis of inherited securities to their fair market value (FMV) on the date of death of the person who initially owned them. If you choose to sell these assets right away, your capital gains tax will be based on any increase in value from that FMV.
2. Carryover Basis: With this method, you assume the same cost basis as the person who originally owned the securities. If they purchased shares at $50 each and you inherit them with that same cost basis, selling them later at $70 would result in a capital gain of $20 per share.
It’s worth noting that not all inherited assets qualify for a stepped-up or stepped-down cost basis adjustment. For instance, if you receive gifts while someone is still alive or inherit certain types of retirement accounts like traditional IRAs or 401(k)s, different rules may apply.
To determine your specific costs bases accurately:
– Gather necessary documentation such as account statements and records.
– Consult with professionals like financial advisors or tax experts who can provide guidance tailored to your situation.
– Keep detailed records of all transactions involving inherited securities as proof for future reference during filing taxes.
Understanding how to calculate your cost basis correctly ensures accurate reporting when it comes time to file taxes and potentially sell those inherited securities someday. It’s always recommended to consult with professionals before making any decisions regarding taxation matters related to inheritance or investments.