Who pays capital gains on inherited stocks?

[Kimaanja]

My grandmother has a stock account that has accrued approximately $40K in LT capital gains.  If I, as the executor, liquidate these assets and distribute the cash to those inheriting, I assume that the capital gains tax would be paid by the estate.  However, if I distribute the shares themselves, and allow the receiver to liquidate them, then I understand they would pay cap gains accrued from the day they took ownership.  What would happen to the original $40K in LT Capital Gains?  Does that still need to be paid by the estate?

[rjs]

Nobody pays tax on the gain that accrued prior to your grandmother's death. That's the great benefit of "stepped up basis." The basis of the stock is the fair market value on the date of her death. Only the gain after that date is taxable. The gain that accrued prior to her death disappears and is never taxed. And it doesn't matter whether the estate sells the stock or the beneficiaries sell the stock. Either the estate or the beneficiaries get the stepped up basis.

If you distribute the shares to the beneficiaries, for the purpose of calculating taxable gain, "the day they took ownership" is the date of your grandmother's death, even though title is not actually transferred until later.

You don't "pay capital gains." Capital gain is the profit you make from selling a stock or other investment. The capital gain is income that you receive, not something that you pay. You pay income tax on the capital gain income that you received.

[Kimaanja]

That is great to hear, thanks.  And yes, I "shorthanded" paying capital gains to mean paying capital gains tax.  THx

[jmj7226]

Along these lines, my wife received stock following her mother's death.  It was transferred to my wife over a year later and remained in the same brokerage fund.  No stock was sold.  The 1099-DIV shows over 15K of capital gains distributions on line 2a.  Is this actually a capital gains distribution since no stock was sold?  Did the brokerage service provide the correct form/calculation?  Any assistance you may provide would be appreciated.

[MarilynG1]

Yes, you received the correct form 1099-Div to report capital gains on the stock your wife inherited.  When the stock is actually sold, you will receive a 1099-B from the broker. 

If you inherit stock that pays a dividend after you have inherited this stock, then this would be considered taxable income to you and would need to be reported on your income tax return.

Qualified dividends are taxed as long-term capital gains.  This means that if your highest income tax bracket is 15% or less, you receive these dividends tax-free.

If your marginal rate of tax is higher than 15%, your qualified dividends are taxed at 15% or 20%, depending on your income.

Click this link for more info on Form 1099-Div. 

Here are instructions on How to Enter a 1099-DIV.