Inherited Stocks, Dividends, and Taxes

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mxs
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Inherited Stocks, Dividends, and Taxes

Post by mxs » Fri Jan 19, 2018 11:03 am

I inherited four different stocks that pay a fairly decent amount of regular dividends (utility and medical stock). The date of death was more than a year ago, and several dividends have been paid and reinvested to buy more fractional shares of stock. It is my understanding that the basis is the mean value of the stocks on the day of death, and any gain in value of the stocks will be taxed at capital gains rates. My question is how are the dividends handled? I read on a previous post that the stocks should be sold 60 days after the most recent dividend so that they are taxed more favorably. Is this information true? I plan on selling all the stock. Is there anything else that I should look at concerning this? The total value is in the 9k to 11k range if that affects anything.

dbr
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Re: Inherited Stocks, Dividends, and Taxes

Post by dbr » Fri Jan 19, 2018 11:07 am

The dividend reinvestments are new purchases of stock that have their own basis if you sell then using specific lot identification. They will have their own gains and losses which would be short term if held less than a year. The amount of money involved is probably too small to bother doing any fine accounting.

mxs
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Re: Inherited Stocks, Dividends, and Taxes

Post by mxs » Fri Jan 19, 2018 11:12 am

Follow-up question, I am assuming the brokerage would send me the tax form with the numbers for taxes owed sometime during the January to March time frame after the stocks are sold. Is that correct? I am not too worried about the fine accounting, just if my general understanding is correct. I would like to be able to give this correct information to the other recipients and be able to do a quick/rough check on the taxes due from the form I expect to receive from the brokerage.

livesoft
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Re: Inherited Stocks, Dividends, and Taxes

Post by livesoft » Fri Jan 19, 2018 11:14 am

You are incorrect about the 60 days after thing. That is because it is the 60 days before or after the day the dividend occurred which means you already fulfilled that.

The shares purchased with the dividends paid in the past 365 dyas are so-called short-term shares and one would pay cap gains tax at ordinary income tax rates if cap gains were realized by selling those shares. The original inherited shares are long-term shares.

No, the broker will not tell you the taxes owed. You have to figure that out for yourself based on all your income and filling out Form 1040.
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mxs
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Re: Inherited Stocks, Dividends, and Taxes

Post by mxs » Fri Jan 19, 2018 12:00 pm

Thanks for the replies. Hypothetical calculation below, does this look correct?

1000 shares of ABC at a value of $9/share on date of death for total value of $9k. Date of Death was November 1st, 2016.
Dividend pays on December 1st, 2016, for $90 total, buying 9 shares at $10 each.
Other dividends pay on March 1st 2017, June 1st 2017, September 1st 2017, and December 1st 2017 for $360 total buying 36 shares at $10 each.

All shares are sold on February 1st 2018 for $11 per share.
The original 1000 shares at $9 each, plus the dividend on December 1st 2016 for 9 shares at $10 each are subject to Long Term Capital Gains.
Dividends on March/June/September/December 1st of 2017 are subject to ordinary income.

$9000 + $90 = $9090 total LTCG basis (1010 shares). 1010 shares x $11/share = $11,110 value - $9,090 basis = $2,020 LTCG taxable amount.

$360 total ordinary income basis (36 shares). 36 shares x $11/share = $396 value - $360 basis = $36 ordinary income taxable amount.

dbr
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Re: Inherited Stocks, Dividends, and Taxes

Post by dbr » Fri Jan 19, 2018 12:02 pm

mxs wrote:
Fri Jan 19, 2018 11:12 am
Follow-up question, I am assuming the brokerage would send me the tax form with the numbers for taxes owed sometime during the January to March time frame after the stocks are sold. Is that correct? I am not too worried about the fine accounting, just if my general understanding is correct. I would like to be able to give this correct information to the other recipients and be able to do a quick/rough check on the taxes due from the form I expect to receive from the brokerage.
As pointed out in the reply just above the broker will send you a statement of your sales and of the cost basis of the shares that you purchased with dividends. It is my understanding that the inherited shares are not "covered" and the cost basis for those shares will not be reported to the IRS. The sale proceeds will be reported for any sales. As a generalization brokers are not tax accountants though they are under requirements to report certain things relevant to taxation. The actual responsibility for filing correctly and paying taxes is 100% yours. The possibility that a broker might do tax withholding for certain transactions should not be confused with actually doing your taxes for you.

dbr
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Re: Inherited Stocks, Dividends, and Taxes

Post by dbr » Fri Jan 19, 2018 12:08 pm

mxs wrote:
Fri Jan 19, 2018 12:00 pm
Thanks for the replies. Hypothetical calculation below, does this look correct?

1000 shares of ABC at a value of $9/share on date of death for total value of $9k. Date of Death was November 1st, 2016.
Dividend pays on December 1st, 2016, for $90 total, buying 9 shares at $10 each.
Other dividends pay on March 1st 2017, June 1st 2017, September 1st 2017, and December 1st 2017 for $360 total buying 36 shares at $10 each.

All shares are sold on February 1st 2018 for $11 per share.
The original 1000 shares at $9 each, plus the dividend on December 1st 2016 for 9 shares at $10 each are subject to Long Term Capital Gains.
Dividends on March/June/September/December 1st of 2017 are subject to ordinary income.

$9000 + $90 = $9090 total LTCG basis (1010 shares). 1010 shares x $11/share = $11,110 value - $9,090 basis = $2,020 LTCG taxable amount.

$360 total ordinary income basis (36 shares). 36 shares x $11/share = $396 value - $360 basis = $36 ordinary income taxable amount.
I think there is some confusion about the dividend reinvestments for M/J/S/D. The dividends themselves would be taxable for 2017 as dividend income which could be qualified dividends or unqualified dividends, but it is not ordinary income. The sale of the 36 shares is not ordinary income of $36 but rather a short term capital gain of $36. The tax rate on that gain depends on how that gain figures into any current or carry-over capital losses that may exist, which is not the same as how that is done for oridinary income. Based on your description the short term gain will have the same tax cost it would have if it were ordinary income, but that does not make it ordinary income and you have to go through Schedule D and the Qualified Dividends and Capital Gain Worksheet to see what happens.

I think you have the rest of it right.

mxs
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Re: Inherited Stocks, Dividends, and Taxes

Post by mxs » Fri Jan 19, 2018 12:34 pm

dbr wrote:
Fri Jan 19, 2018 12:08 pm
mxs wrote:
Fri Jan 19, 2018 12:00 pm
Thanks for the replies. Hypothetical calculation below, does this look correct?

1000 shares of ABC at a value of $9/share on date of death for total value of $9k. Date of Death was November 1st, 2016.
Dividend pays on December 1st, 2016, for $90 total, buying 9 shares at $10 each.
Other dividends pay on March 1st 2017, June 1st 2017, September 1st 2017, and December 1st 2017 for $360 total buying 36 shares at $10 each.

All shares are sold on February 1st 2018 for $11 per share.
The original 1000 shares at $9 each, plus the dividend on December 1st 2016 for 9 shares at $10 each are subject to Long Term Capital Gains.
Dividends on March/June/September/December 1st of 2017 are subject to ordinary income.

$9000 + $90 = $9090 total LTCG basis (1010 shares). 1010 shares x $11/share = $11,110 value - $9,090 basis = $2,020 LTCG taxable amount.

$360 total ordinary income basis (36 shares). 36 shares x $11/share = $396 value - $360 basis = $36 ordinary income taxable amount.
I think there is some confusion about the dividend reinvestments for M/J/S/D. The dividends themselves would be taxable for 2017 as dividend income which could be qualified dividends or unqualified dividends, but it is not ordinary income. The sale of the 36 shares is not ordinary income of $36 but rather a short term capital gain of $36. The tax rate on that gain depends on how that gain figures into any current or carry-over capital losses that may exist, which is not the same as how that is done for oridinary income. Based on your description the short term gain will have the same tax cost it would have if it were ordinary income, but that does not make it ordinary income and you have to go through Schedule D and the Qualified Dividends and Capital Gain Worksheet to see what happens.

I think you have the rest of it right.
Thanks again for all replies. I see the distinction between the dividend being treated as short term capital gains, not ordinary income. I think in our scenario it will end up being taxed at ordinary income rates, but must be filled out on the Schedule D and Qualified Dividends and Capital Gain Worksheet.

Anything else I should know about selling, or is any time as good as another? The dividends are pretty regular, so I can time the sale to the dividend time for maximal benefit. I am guessing selling right before the dividend hits is the best time so it is treated as short term capital gains instead of Qualified Dividend generally speaking, but again in our scenario it may be taxed at ordinary income rates either way.

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Epsilon Delta
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Re: Inherited Stocks, Dividends, and Taxes

Post by Epsilon Delta » Fri Jan 19, 2018 6:32 pm

mxs wrote:
Fri Jan 19, 2018 12:00 pm
1000 shares of ABC at a value of $9/share on date of death for total value of $9k. Date of Death was November 1st, 2016.
Dividend pays on December 1st, 2016, for $90 total, buying 9 shares at $10 each.
That $90 dividend should be on some 2016 tax return. Could be the estates income tax return or it could be the inheritors.

livesoft
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Re: Inherited Stocks, Dividends, and Taxes

Post by livesoft » Fri Jan 19, 2018 6:42 pm

I'm not following the dividend versus ST cap gains thing. The paid dividends will be qualified dividends as long as the investment pays dividends eligible for qualified status. That is, your personal holding period has always been met. So the dividend will not be treated as a ST cap gains.

Any shares bought with dividends, held less than 366 days, and sold will be treated as short-term shares. There appears to be no reason to me to wait to sell shares until after the next dividend payment. In any event the dividend should not be automatically reinvested.
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dbr
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Re: Inherited Stocks, Dividends, and Taxes

Post by dbr » Sat Jan 20, 2018 9:59 am

mxs wrote:
Fri Jan 19, 2018 12:34 pm


Thanks again for all replies. I see the distinction between the dividend being treated as short term capital gains, not ordinary income. I think in our scenario it will end up being taxed at ordinary income rates, but must be filled out on the Schedule D and Qualified Dividends and Capital Gain Worksheet.

No, no the dividend income is not short term capital gains. Gains in the shares purchased by reinvesting the dividend would be short term in your scenario. There are two separate tax items here. You have to be very specific in the language you use.


Anything else I should know about selling, or is any time as good as another? The dividends are pretty regular, so I can time the sale to the dividend time for maximal benefit. I am guessing selling right before the dividend hits is the best time so it is treated as short term capital gains instead of Qualified Dividend generally speaking, but again in our scenario it may be taxed at ordinary income rates either way.

You can look up the concept of "buying the dividend" to talk about the timing or before or after dividends. But I don't understand your sentence ". . . it is treated . . ." What is "it"?

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