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Estate taxes

Chris Farrell Feb 2, 2010

Question: My mother purchased some stock in 1995 @ $25 a share, the current MV is approximately $42 plus. My mom is 85 years old and wants to sell the stock and put it into her savings account, she doesn’t need the money. What would be the tax consequence if she sold it versus holding onto it and the stock becoming part of her estate? Secondly, is her age a factor? Loretta, Fairlawn, OH

Answer: Ah, you would think this would be a simple answer. I wish it was an easy one, too. But the answer is complicated for 2010 (and maybe beyond). So, I’ll give you a general sense of the tax rules concerning your question. But before you do anything you will need to consult with a tax professional. That’s my main piece of advice. By the end of this post you’ll understand why.

I am going to focus on the tax aspect of your question. There are other issues, of course, including issues like adding to her easily tapped pool of savings to her savings to her budget needs.

Now, if she sells the stock in 2010 she could end up avoiding capital gains tax depending on her bracket. For instance, if she is in the 10% or 15% tax bracket she won’t owe any capital gains tax. It’s 0%. However, if she is in the 25% to 35% tax bracket the rate is 15%. That’s still a low number.

The current capital gains tax rates are scheduled to expire in 2011. The rate will climb to 10% for low income folks and 20% for everyone else. (There are a few wrinkles but that’s the basic idea.) The President’s new budget blueprint also proposes several changes in tax law. For instance, the two top income-tax brackets (they would rise to 36% and 39.6%, from 33% and 35%, respectively). He has the dividend and capital gains tax rates at 20% for anyone earning over $250,000. But who knows what will come out of Congress.

Now, to the other part of your question: She doesn’t sell the stock and it became part of her estate. You won’t owe any capital gain at inheritance. To take your example, you inherit the stock at $42-plus as part of her estate and sell it for $42-plus a share. You will owe zero capital gains tax. Technically, it’s called a step-up basis and it been the rule for a considerable period of time. (That said, there is a weird twist for 2010. The estate tax has expired. So, for this year alone the step-up basis is limited to a maximum of $4.3 million in an estate. Of course, that means the rule change doesn’t matter for all but a very small minority of families. By the way, the estate tax comes back and the traditional step-up basis in 2011. Go figure. I can’t.)

Her age isn’t a factor in the capital gains equation.

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