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Dear Tax Talk,

I received a monetary payout from the sale of my deceased father’s stock shares after his death. I turned around and applied them to my mother’s long-term care facility to help pay for that. I received a 1099-B form for the proceeds. I am pretty sure I know the answer, but must I include this income in my taxes? Or can it be claimed as an inheritance since I was listed as a beneficiary for this? Do I have to pay taxes on an inheritance? Thank you.

— Peter

Dear Peter,

You must report on your tax return the sale of the stock that you inherited from your father. However, since you inherited the stock, your “cost basis” for calculating the gain or loss will generally be the fair market value of the stock on your father’s date of death, and this may help your tax situation.

So what does this mean for you? You will report the sale of the stock on Part II of Schedule D, Capital Gains and Losses, because inherited stock qualifies for long-term capital gain treatment. You will report the sales proceeds in column (d) and then report your “basis” in column (e). Remember, your basis is reported at the fair market value on the date of death, so this should hopefully help minimize any tax gain you might have.

What is cost basis?

Cost basis is the original value of an asset (generally the purchase price), plus any commission, adjusted for stock splits, dividends and capital distributions. The difference between the basis and the current market value determines capital gain (or loss).

But if you inherit the asset, you get a step-up in basis, as if it were purchased on the decedent’s date of death.

There is another issue here regarding the money you paid for your mother’s long-term care facility. This may be deductible as a medical expense on Schedule A if your mother can be claimed as a dependent on your tax return. You may want to explore this issue further, as certain requirements must be met in order to claim a parent as a dependent and there are limitations on medical deductions.

Thanks for the great question and all the best to you.

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