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I have a question about taxes and death. If you own stock and you sell it for a profit, you have to pay tax on the profit. Is this same tax applied to someone when they die? I understand that Estate Tax has a $5 Million threshold, but I think the Estate Tax is totally different than what I am talking about here. Wouldn't the person that dies still have to pay income tax on the stock profits that were made in the year they died? My understanding is that when you die, the stocks are sold and then the money is given to the beneficiary or the stock is repurchased in the beneficiaries name. But, the person that died still has to pay taxes on their profits in the year they died, right?

  • I'm guessing you're asking about the United States? – littleadv Jan 3 '16 at 1:59
  • Correct. New Jersey to be specific. – ADH Jan 3 '16 at 2:05
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My understanding is that when you die, the stocks are sold and then the money is given to the beneficiary or the stock is repurchased in the beneficiaries name.

This is wrong, and the conclusion you draw from michael's otherwise correct answer follows your false assumption.

You seem to understand the Estate Tax federal threshold. Jersey would have its own, and I have no idea how it works there. If the decedent happened to trade in the tax year prior to passing, normal tax rules apply.

Now, if the executor chooses to sell off and liquidate the estate to cash, there's no further taxable gain, a $5M portfolio can have millions in long term gain, but the step up basis pretty much negates all of it.

If that's the case, the beneficiaries aren't likely to repurchase those shares, in fact, they might not even know what the list of stocks was, unless they sifted through the asset list. But, that sale was unnecessary, assets can be divvied up and distributed in-kind, each beneficiary getting their fraction of the number of shares of each stock. And then your share of the $5M has a stepped up basis, meaning if you sell that day, your gains are near zero. You might owe a few dollars for whatever the share move in the time passing between the step up date and date you sell.

I hope that clarifies your misunderstanding.

By the way, the IRS is just an intermediary. It's congress that writes the laws, including the tangled web of tax code. The IRS is the moral equivalent of a great customer service team working for a company we don't care for.

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Stocks (among other property) currently is allowed a "stepped-up basis" when valuing for estate tax purpose.

From the US IRS web page:

To determine if the sale of inherited property is taxable, you must first determine your basis in the property. The basis of property inherited from a decedent is generally one of the following: The fair market value (FMV) of the property on the date of the decedent's death. The FMV of the property on the alternate valuation date if the executor of the estate chooses to use alternate valuation. See the Instructions for Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return. If you or your spouse gave the property to the decedent within one year before the decedent's death, see Publication 551, Basis of Assets.

Your question continues "the person that died still has to pay taxes on their profits in the year they died, right?"

Yes. The estate would be subject to tax on realized gains/losses prior to death.

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    In other words, not even dying saves you from the IRS. – Aganju Jan 3 '16 at 3:58

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