NUA - Step Up Of Cost Basis For NUA Shares

[Romper]

Upon my retirement in 2006 I utilized the NUA option to transfer the shares of my company stock from my 401k to a taxable brokerage account.

I received an IRS Form 1099-R showing the gross distribution (box 1), the taxable amount (box 2a) and the net unrealized appreciation (box 6). I paid the tax on the taxable amount.

We live in Arizona. Arizona is a Community Property State.

As residents of Arizona - upon the death of one of the spouses the cost basis for assets of both spouses are stepped up to the value on the date of death.

My wife passed away earlier this year (2023).

I requested that the cost basis for the stocks in our brokerage accounts be stepped up to the values as her date of death.

The cost basis for each stock was stepped up without difficulty. However, the cost basis for the shares in my NUA was also stepped up.

I believe the NUA rules state that the NUA is not eligible for a step up.

Am I correct?

Do I need to do anything? If so what action is recommended?

Thanks in advance.

[dmertz · Accepted solution]

NUA is not eligible for a step-up in basis because that amount is considered to be deferred income.  However, any appreciation of the shares after distribution does get stepped up.

These are should be uncovered shares, so the brokerage should not be reporting the basis to the IRS on the Form 1099-B when the shares are sold.  For your own and possibly your heir's purposes it would probably be helpful for the brokerage to have a correct record of the basis.  Even if the brokerage somehow reports incorrect basis, the basis can be corrected on the tax return, but that requires the one preparing the tax return to know the correct basis and not use the incorrect basis provided by the brokerage.

[Romper]

Thanks dmertz...

Yes, since the shares were purchased in 2006 and before, they would be uncovered shares.

I am aware that the shares after the NUA receive a step-up.

I have advised xyz of the correct basis. I sold 100 shares to test the system. I believe I will wait for the 1099 for 2023 to see how they report that sale.