Posted on 07/27/2012 10:18:55 PM PDT by Graybeard58
I'm retired but while still employed I bought stock in the company I worked for and my wife still buys stock in the company she works for. We've bought lesser amounts in other stocks from time to time with after tax money but these two are our major investments.
This stock was bought with after tax money, in her case through payroll deduction with a 15% company match, no match for me in addition she owns some company stock in her 401K. I understand the 401K is untaxed until she starts withdrawing and she will owe taxes on the full amount withdrawn.
We've never sold stock, only bought it. In both plans, dividends are reinvested and every year we get a statement and pay taxes on those dividends.
I don't foresee a circumstance where we will sell while I'm alive. My question is, if she sells stock after I'm gone, what will she pay taxes on? These stocks were bought at widely different prices over the years and I know she would pay taxes on the price appreciation but how do we know what shares were bought when and at what price?
I'm off to bed after posting this but will check tomorrow and appreciate any help given.
There are so many variables. Many brokers will be able to give you the basis of your investments then you will be taxed on the gain.Some companies will expect you to have kept them organized over time and you would figure it. Push for your broker to get the basis for you. You want to make sure you are not paying tax on dividends already taxed. Talk to a tax accountant. It can be a challenge and you have to be careful.
Good luck!
First, you really should speak with a competent tax specialist. There are so many special variables to everyones’ situation that a tax attorney, and jurisdiction that it is well worth the hourly fee on a big question like this.
That said, the answer depends in part on how your stock is owned. If it is in your name only, your wife would probably qualify for what is called a stepped-up basis. In other words, if she sold the shares in the years after your death, she would pay capital gains taxes on the sales price minus the value of the share on your date of death. The actual amount you paid would not matter in that case, because her basis in the shares had been stepped up to the value as of your date of death.
If the shares are owned jointly, then she would only get the stepped up basis on half the shares. It is likely that your company does have records of what you paid for the stock you own, assuming you acquired it directly from them. If you bought the shares through a brokerage firm, and did not save the records, then you have a project. The brokerage may be able to trace this info for you.
In closing, again, talk to a real tax attorney, because the laws are complex and there may be legal and reasonable ways to avoid taxes for yourself and your heirs.
You’ve asked several questions. Unless this has changed (and this is where I would caution you to check with your tax expert) you have the ability to “designate lots” (and that’s the exact term) wrt stock buys & sells.
Eg;
You bought 200 shs XYZ in 1999 @ $40 a share
You bought 200 shs XYZ in 2005 @ $50 a share
You bought 200 shs XYZ in 2009 @ $28 a share
You bought 200 shs XYZ in Dec 2011 @ $34 a share
It’s 2012 and you want to sell some stock. XYZ is $34.
You sell 200 shs XYZ
You can, completely at your discretion:
Claim you sold your 1999 shares and lost $6/sh so you lost
$1200, long term capital loss.
Claim you sold 100 shs of your 1999 shares and 100 shares of your 2009 shares, gaining $6 on one lot and losing $6 on the other lot, for a gain/loss of zero.
Claim you sold 200 of your 2005 shares for a loss of $16/sh or $3200. LT treatment.
Any which way you want, as long as you don’t sell the same-lot shares twice. You have to be Angelo Mozillo or Jamie Dimon to do that. You can say you sold 47 shares of this year, 38 of that year, and I have used this technique many times to create a precise (within say $50) loss or gain to offset another gain or loss taken on other stock. A valuable technique.
Should you die before your wife, in most cases, the two of you own your estate as community property in the form of two undivided (and indistinguishable) halves. She gets your half and becomes 100% owner and generally free from estate taxes. That is the simplest, most common situation. It is when the *second* spouse dies that, because *he/she* owns a much bigger estate, that the kids may incur some estate taxes.
Incidentally, suppose the two of you held a joint stock account. You bot 200 shs ABC @ $10/sh in 2000. Years later, one dies. The estate generally goes through a process where assets are valued as of date of death. Suppose one dies in 2012 and ABC is now $90 a share. The surviving spouse owns 100 shs @ $10 and 10 shs @ $90 because he/she inherits the *stepped-up* value as of date of death. Should the survivor wish to sell half those shares, she/he would typically designate the more expensive shs to sell. Those shs would have a basis of $90 and if they were sold at say $92, there would only be a $2 gain. Short term if transferred less than a yr before date of sale (pretty sure about that, but check) Or, she/he could sell the $10 shares and pay tax on an $82 gain. Obviously detrimental. Inherited assets get revalued as of date of death. A very, very important concept. Which is (one reason) why putting children on a real estate title on property held for many years is usually a horrible, horrible mistake, and can cost tens of thousands in taxes.
Generally these should just be rolled over into the account. Taxes are normally only paid when a check is sent to you and not reinvested.
Sell company stock ASAP without affecting the 15% discount. Never put so many similar eggs in your basket. Never put more than 20% directly into stocks. Never own less than 5 stocks. Balance stocks across sectors. You will not be able to objectively manage a stock purchased from your company. If anyone questions your timing when you sell, you will not be able to battle charges of insider trading.
NUA is often overlooked but very important to look in to, especially if you think the children will likely inherit.
Dividends, even if reinvested, are considered taxable in the year received, unless inside an IRA or other tax deferred account. I believe he is referring to his after tax investments.
for later
I’m a CPA for 35 years and prepare 400+ returns per year. If you were a regular client I would not answer this based on the information you provide even if I knew your tax situation without doing several projections long and short term, obtaining more documentation, and evaluating against your estate tax plan, gift tax and beneficiaries tax.
You need to spend some money on tax planning for this period of your life. Get a relationship with a local CPA. Things can change fast during retirement and you should have a team of professionals available.
Just burn the stock and you will be ahead.
1. I just typed ‘rules on inheriting stocks’ in the search bar and found this site where it talks about stepped up basis for the person receiving the stock:
http://www.fairmark.com/capgain/basis/decedent.htm
2. If you have significant assets and you know you will likely owe estate tax, you may want to look into estate planning so you can plan now to avoid estate taxes.
3. If you’d rather do some research on your own, there is a lot of info on the Internet, or find a good book on estate planning.
4. I recently read a book (from the library) by Ed Slott (who appears regularly on PBS) titled Stay Rich for Life. Not an exciting read, but the most interesting thing is the chapter on using life insurance to provide a big sum of money for your family after you’re gone, so you don’t have to scrimp and save while you’re alive, but can spend the money on vacations, etc. Another interesting thing is about how one can stretch the IRA using the life expectancy of the beneficiary so as to pay as little tax as possible. Of course, the best way is to convert a traditional IRA into a Roth.
5. I think you can also gift away stocks (or cash) every year to family members and they will receive the gift with stepped-up basis as well. So it won’t trigger a taxable event for you or for the recipient. You might want to check into this as a way to reduce your estate.
6. If the stocks have appreciated a lot over the years, you may want to sell some now. With the global economic uncertainties, it is not likely we’ll have a repeat of the bull markets like we had in the past.
“Generally these should just be rolled over into the account. Taxes are normally only paid when a check is sent to you and not reinvested.”
I believe taxes on the dividends are due once they are declared even though they are reinvested in the account.
yes, ole spunkets may be getting a little knock on the door from the IRS soon
#jackbootedthugs
#atthepointofagun
The investor relations department and/or the stock transfer agent for each company has all the dates and cost basis records for each share purchased.
K. I think it is a 401K, but don't know exactly. It just says, "The plan".
This only applies to a 401K and there's no point in distinguishing what part is dividend for tax purposes in that event. Otherwise tax is due in the year the check is recieved.
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