Stock Inheritance Case Study

Overview:

Financial investing comes with significant responsibility to ensure that all risks associated with the assets are examined closely. Following the unforeseen death of both parents, a client comes to Chandler & Knowles CPAs seeking financial expert guidance after inheriting a substantial amount in stock. While the financial gain was a benefit, the client was fully unaware that the asset inherited required specific reporting according to tax regulations. The IRS requires the reporting of assets such as homes, cars, collectables, and stocks in what is known as a Schedule D form. Unfortunately for our client, the mistake of not submitting the adequate filings with the IRS created an array of complex financial problems that may take years to resolve due to the nature of the case.

Client Background:

Before coming to Chandler & Knowles CPAs, our client experienced personal obstacles after the death of both parents. To make matters worse, our client suffered personal medical issues that resulted in expensive hospital bills not covered by their health insurance. Left with significant personal loss, the last thing on our client’s mind was the financial gain and management of the assets inherited. The lack of attention to this matter however caused an accumulation of costly financial complications for the client. When it comes to inherited assets like stocks, the IRS requires beneficiaries to report the value of the asset based on short-term and long-term gains and losses. Unfortunately for our client, the gross proceeds of the stocks inherited were not properly filed to the IRS. Another significant obstacle in this case was that there was never a will or a probate set in place for the deceased parents, ultimately placing the responsibly of the stocks and penalties on the client.

Challenges:

The IRS requires individuals to report stock assets in their individual tax return. When it comes to stocks, the timing of reporting is crucial to determining how the IRS taxes individuals on their assets. For our client, filing the stock assets onto Form 8949 Sales and Other Dispositions of Capital Assets, but not transferring the information to a Schedule D (1040) form created the following challenges in this case:

• In short-term capital gains, the IRS determines the tax rate of assets like stocks around the same rate as income tax as high as 10 to 39%. Since in this case the stock asset was not reported on a Schedule D form, the IRS automatically assumed 100% of the gross proceeds were short-term capital gains. This simple mistake placed our client on a much high tax rate when compared to a long-term capital gain tax rate. If our client has disposed of the stock immediately, this would classify the asset as having zero capital gain.
• Long-term capital gains benefit from a reduced tax rates on capital gains. The IRS taxes long-term capital gains as low as 0% to 20% for most taxpayers. For individuals with a tax rate less than 15%, the IRS can set a rate of 0% in a long-term capital gain. Since our client earned a relatively high income, filing a Schedule D could have saved up to 19% off the regular income rate set by the IRS.
• Classified as a short-term capital gain, the IRS placed a $100,000 lien on the home inherited by the client’s after she was unable to pay the high tax rate on the stock inherence. The client had plans to pay medical expenses with their home, but the $100,000 lien eliminated this option. This issue could have been easily averted if our client had filed the assets a Schedule D form.
• Another significant challenge in the case is that there was not a will set in place for the deceased. Filing a probate with an attorney would have allowed the client to list the stocks on the inventory list for probate. This action would have been sufficient documentation to help removed the $100,000 lien on the inherited home. However, banks and brokers do not keep records past a certain period, making a probate a complex matter in the case.

Chandler & Knowles Methodology:

One of the biggest challenges in this case was reversing the $100,000 lien on the home our client needed to pay for hospital expenses. After an analysis, Chandler & Knowles CPAs filed an amended return to the IRS to revise the Schedule D forms that should have been included in the return.

• Since the client did not file taxes originally through the use of professional services, the waiting period for this case could take several years to resolve.