USA Capital gains tax on gifted/joint stocks?

[jcright]

Hello all,

I have a question on taxes in regards to capital gains on stocks.

My story is that my father opened up a joint account between himself and myself with one of the stock brokers. This was done back in the 80's. I never contributed my own money to buying stocks. My father always paid the taxes on the stocks and he also received the interest/dividends from those stocks. In doing so he reinvested those in stocks and grew the portfolio a little bit.

Last month my father died. Originally the brokerage firm told me that I would have to pay half of the capital gains. The example they gave me was that if he bought a stock at $50 and it increased to $100, then I was responsible for paying taxes on the $25 gain, not the $50 gain. In going through my father's paperwork, I have found notes stating that I should not have to pay capital gains taxes on the stock (unless it goes up after his death).

Do I have any grounds to not pay captial gains since I never used my money to buy stocks and I never received the interest nor pay any taxes. Do I have to prove this to the IRS?

Thank you,
John

 

[BIG E]

What you need to do is first find out how what the exact titling of the account says.
Is it joint tenants with right of survivorship, joint tenants in common, your father's name in trust for you, or is it titled as TOD or POD with your name which means that at death you automatically inherit the asset(s)?
Then you need to find any legal documents that he prepared where it specifically states how his assets are to be distributed upon his death.
Never mind what the broker told you - they are not tax advisors and often give bad tax advice.
I strongly suggest that you consult with a CPA or tax Attorney to sort this information out and properly guide you.
It would appear from what you've stated - that since all of the transactions occurred while he was alive, his final tax return should report all of the taxable income (including capital gains) until the date of his death.
You also don't pay any taxes upon the mere transfer of assets to you from someone's death. It's important for you to know what the Fair Market Value was for each asset you inherit on the date of your father's death. That FMV DOD becomes your initial "Cost Basis" to use in determining your gain/loss when you sell the asset.

 

[jcright]

Thanks for responding. I'll looking to a tax attorney. The title is joint tenant with right of survivorship.

 

[BIG E]

All I can tell you then, is that for all these years - your father SHOULD HAVE been nomineeing 1/2 of the tax reporting to you.
That involves issuing a 1099-DIV, 1099-INT, 1099-B to transfer 1/2 the total information to you in your Social Security number.
That's what you need to see an attorney for.
The normal JTWRS situation is a married couple filing a joint tax return.

 

[MoralesTax]

First, I think it would be prudent to mention that you do not owe any capital gains tax on the stock, if it is NOT sold. In other words, it needs to be sold, in order for there to be a gain or loss. You could choose to keep it, have it generate passive income and not worry about potential capital gains. There is also another strategy (see below).

Second, if the account is indeed titled joint tenant with right of survivorship, then you receive a step-up in basis, based on your father's percentage of contribution. From what you're saying, it appears he was the sole contributor to the account. Therefore, you should receive 100% of step up in basis. However, each state is different and the IRS will defer to the state law on its definition of JTWRS (whether a hard 50/50, dependent on contribution, or an alternative). So confirm with a tax attorney.

Lastly, you can file the tax return and make a disclosure of your position. The IRS then has up to three years to challenge your position. The advantage here is that if the IRS disagrees with you and reverses your position, you won't be subjected to the substantial underpayment penalty. Use Form 8275 for this disclosure.

If there is substantial capital gains and you want an exit strategy to minimize the tax burden, you could consider deferring the capital gains into Qualified Opportunity Zone Funds. These QOZF's will invest your funds in areas designated by the federal government, and after a 10-year holding period, you inherit the FMV as cost basis and won't have capital gains anymore (if done properly). Feel free to contact me for more info on this.