Friday, January 28, 2022

Let’s Step It Up

Ask The CFP® Practitioner

“Courage is an accumulation of small steps.”                    

~ George Konrad, Hungarian Novelist

Question: I’m in the midst of year-end tax planning and have questions about the cost basis of stock. Under what circumstances can it be increased?

Answer: The dictionary definition of cost basis is the original value of an asset used for tax-purposes. Cost basis can be adjusted for corporate actions, distributions, wash sale rules and income reallocation. The difference between cost basis and current value defines the tax implications when property like stocks or bonds are disposed of either by selling or transferring ownership.

Cost basis is a simple number that can make a dramatic difference when it comes to taxes. The Internal Revenue Service uses cost basis to calculate the gain or loss you’ve realized from the sale of a particular asset, including tangible property and investments. You typically will owe short-or long-term capital gains taxes on the gains realized when you sell the asset, if the asset has appreciated between the when you purchased it and when it’s sold. Your cost basis matters when it comes to estate planning, too. Here’s why:

If you purchased 1,000 shares of a tech company stock in 1980, when it was approximately $10 per share, and held on to it and now, decades later, the stock is now valued at $116 per share. The tax treatment of the gain could be based on the $106 per share gain and be a big addition to your tax bill or there are other ways to consider handling this situation. Here’s the breakdown:

Scenario 1: You sell the stock yourself.

You’ll reap $106,000 in gains but also owe Uncle Sam $21,200 in long-term capital gains taxes (assuming the 20% rate, which could be higher for those subject to the Medicare surtax).

Now, consider this.

Scenario 2: You bequeath your shares to your children.

When your children inherit, they enjoy a “cost-basis step-up” to the stock’s fair market value (FMV) on the date of your passing ($116/share). The stock also is automatically consid¬ered a long-term holding, regardless of whether you yourself held it for more than a year. The step-up nar¬rows the amount of gain that would be subject to long-term capital gains taxes if the stock appreciates further. If your children immediately sell the inherited shares, they will owe $0 in capital gains taxes, even though the stock appreciated significantly during your ownership.

Tax savings: That’s a potential savings of $21,200 with cost-basis step-ups as part of your estate and tax planning.

There are a couple of variations of cost-basis step-ups, including ones that take joint ownership of the original asset into account and one that uses an alternate valuation date. Some accounts qualify for an alternate valuation six months from the original date of death. Because taxes are complicated, it’s wise to consult with your financial and tax professionals in order to stay within the guidelines.

If the asset in question has lost value, a step-down will occur, so selling the asset, rather than bequeathing it, may make more sense. The moral of the story is to check with your team of trusted financial professionals, including your CERTIFIED FINANCIAL PLANNER™ practitioner before making decisions or taking any actions that could impact your overall circumstances. Doing so might be one of the best gifts you give to yourself and future generations. Stay focused and plan accordingly.

Consult your tax advisor to assess your situation. Raymond James advisors do not provide tax advice and are not qualified to render advice on legal matters. The opinions expressed are those of the writer, but not necessarily those of Raymond James and Associates, and subject to change at any time. There may be tax-consequences to tax-loss selling. Links are being provided for information purposes only. Raymond James is not affiliated with and does not endorse, authorize or sponsor any of the listed web sites or their respective sponsors. Raymond James is not responsible for the content of any web site or the collection or use of information regarding any web site’s users and/or members.

“Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™, CFP® (with plaque design) and CFP® (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements.”

This article provided by Darcie Guerin, CFP®, Vice President, Investments & Branch Manager of Raymond James & Associates, Inc. Member New York Stock Exchange/SIPC 606 Bald Eagle Dr. Suite 401, Marco Island, FL 34145. She may be reached at 239-389-1041, email Website:

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