How do you calculate the cost basis of inherited stock?June 22, 2011: 5:00 AM ET
I recently sold some stock that I'd inherited from my wife when she passed away. She had inherited it from her parents after they passed away. Is my cost basis on the date my wife died or is it when her parents died? — Lloyd Millstein, Raleigh, N.C.
The cost basis will be the fair market value of the stock on the date your wife passed away, says Miles Padgett, a partner in the law firm Kozusko Harris Vetter Wareh LLP, which specializes in tax law and estate planning.
To determine the value of the stock, calculate the average of the high and low prices of the shares on the date of her death, says Linda Sears, a CPA who specializes in estate planning and trusts in Marietta, Ga. If she passed away on a Saturday or Sunday, then the value would be the average of high and low prices of both Friday and Monday.
If you're wondering about estate taxes, here are the basics: Up to $5 million of an estate's value is exempt from taxes. So if the value of your wife's estate is less than $5 million, you won't owe any estate taxes. Anything over that amount will be taxed at a 35% rate.
Things get a little tricky if your wife passed away in 2010, however, and you should consider consulting an estate attorney. That's the year Congress gave executors the choice between two different tax regimes: either to employ the traditional $5 million estate tax exemption or to opt out of the estate tax altogether.
Opting out of the estate tax is the best option for estates valued at more than $5 million, says Sears. But it's a complicated strategy and one best left up to the pros.
— Nicole Ridgway