NUA - Calculation Of Cost Basis Following Step-Up Of Appreciated Value

[Romper]

When I retired, I took the Net Unrealized Appreciation (NUA) option to move my company stock to a brokerage account at one of the big three (XYZ).

We are Arizona residents. Arizona is a Community Property state. As Community Property, upon the death of the first spouse, the cost basis for both spouse’s non IRA assets are stepped up to the market value on the date of death. This includes the shares of my company stock in the NUA.

Unfortunately my wife died recently. Following her death, XYZ stepped up the cost basis to the value on her date of death.

NUA rules state the NUA does not receive a step-up. XYZ stepped up the full amount without adjusting for the NUA.

Any appreciation beyond the distribution date of the NUA does receive a step-up.

I need to advise XYZ to adjust the cost basis for tax reporting.

Questions:

1. Am I understanding the process correctly?
2. Am I calculating the average cost basis of $33.33 / share correctly?

Shares of stock held on date of spouse’s death.	3,000
Value of shares on date of death.       (Yahoo Finance = $50.00 / share)	$150,000
Net Unrealized Appreciation (NUA)	- $50,000
Appreciation in value since distribution of the NUA. (Step-up – For Ref. only)	$100,000
Cost basis per share for all shares held on DOD.     ($150,000 ÷ 3,000)	$50.00
Cost basis per share for the NUA shares held on DOD.   ($50,000 ÷ 3,000)	- $16.67
Resulting average cost basis per share for any shares sold.  ($50.00 - $16.67)	$33.33

[RobertB4444]

When you took the NUA your shares were supposed to be placed into a retirement account, not a brokerage account.  At the time that you took the NUA you were to pay all the taxes on the basis that you held in the stock and the tax advantage is that you would only have to pay capital gains tax on the distributions from the retirement account instead of regular income tax as the stock was sold.

Since you transferred the stock to a brokerage account instead of a tax advantaged account you lost the tax advantage to the NUA.  In addition, the brokerage that you are dealing with isn't going to have had any experience with a NUA transfer and they aren't going to be able to help you.  They are correct that you get a step up in basis due to the passing of your spouse, however.  

Here is an article on NUA from the IRS.  It's kind of jargon-y but it gets the idea across.

Very sorry for your loss.

@Romper 

[Romper]

Thankyou RobertB4444

Perhaps you can provide supporting information for your statements "your shares were supposed to be placed into a retirement account, not a brokerage account" and "you lost the tax advantage to the NUA".

I believe the following to be correct. Your reply is invited.

There are two options when transferring from a 401k. Transfer to an IRA or transfer to brokerage account using Net Unrealized Appreciation. Search YouTube for NUA and you will see numerous videos explaining how it works.

One does not lose the NUA by transferring to a brokerage account as supported by the 1099-R I received for the transfer. Box 6 clearly notes it is a NUA.

I did pay the tax due on the original cost basis noted on the 1099-R.

You note "you would only have to pay capital gains tax on the distributions from the retirement account". My understanding is all distributions from an IRA are taxed at Ordinary tax rates. Plus you are subject to RMD's each year. Assuming I am correct, this would have been a disaster.

I do agree that the step-up for the appreciation is correct but only because I am a resident of a Community Property state. If I lived in a non community property state the step-up would only be available following my death.

Thankyou for your condolences...

Romper

[RobertB4444]

I apologize.  You transferred the shares into a retirement account AND THEN into a brokerage account.  That maintains the NUA.  The IRS regulations are clear that the stock must be transferred into a tax deferred account in order to get the benefit but if you have already paid the NUA then you are good to go for the transfer.

Because of this all of the math in your original post is correct.  You seem to be doing everything just fine.

@Romper 

[Romper]

Thanks Robert..

A bit of clarification for others who may read this:

As noted in my original posting, the shares of my company stock went directly to a taxable brokerage account. I did not transfer to a retirement account first.

My transfer was identified as an NUA on the 1099-R I received and I paid the tax as ordinary income for the cost basis in the year of the transfer.