Last week, we talked about “Ivan” and the challenges he faced 20 years after his grandparents gifted him stocks. If you recall, Ivan was thinking about selling the stocks, but first he had some hurdles to overcome. He had to find out his grandparents' cost bases (the original prices) for the various stocks he received as gifts decades ago. He also needed to find the cost bases of the additional shares he himself purchased through dividend reinvestments.

Depending on the records Ivan already had on hand, there potentially was a lot of work ahead for him. He would need to consult with a tax adviser or accountant to form a game plan for gathering the missing information.

Last week’s column focused on gifts. What about inheritances? E.B., a longtime reader of this column, wanted to know: “I had always understood that -- upon my death -- the stocks which my children will inherit will have the date of my demise as a cost basis. Am I wrong, or is the tax law different for gifted stock vs. inherited stock?”

E.B., thank you for asking. Here is a quick answer: Yes, the tax laws differentiate between stocks your children inherit from you and stocks that you gift to them during your lifetime.

First, before diving into the differences, let me remind you to be sure to talk with your tax adviser before taking any action. Each taxpayer’s situation is unique, and the tax laws can be complicated.

Now, let’s review some basics. First, what does the IRS say about inheritances? The resource is IRS Publication 551, “Basis of Assets” (tinyurl.com/ydy2pqmr). Under the section titled “Inherited Property,” you’ll see the paragraph:

“The basis of property inherited from a decedent is generally one of the following,” with the first situation enumerated being: “The FMV [fair market value] of the property at the date of the individual’s death.” There it is.

But, notice the word “generally.” Again, this is why you need your tax adviser at your side before taking any action.

You should be aware that the estate may choose to use an “alternative valuation date” other than the date of death. For more information, read the Instructions for Form 706 (tinyurl.com/ycn7q6xa); Section 2032 of the Internal Revenue Code applies (tinyurl.com/y974sp29).

The remaining situations address other assets, such as farmland, not stocks.

In most situations like E.B.’s, the cost bases of the stocks will be determined on the date of death (or an alternative valuation date), unlike a situation involving a gift.

As to whether an alternative date needs to be considered, your tax adviser will step in, since the decision depends on an individual’s particular tax situation.

The rules for inheriting a tax-deferred account, such as an IRA, are more complex, and that’s something I’ll discuss in a future column.

On another matter, if you are interested in the basics of retirement investing, join me for a virtual presentation, “You’re retired -- it’s time to revisit your financial plan.” It will be held on Wednesday, March 17, at 1 p.m. EDT, and is sponsored by the Greenwich (Connecticut) Library. To register, go to tinyurl.com/3paf657y or contact Yang Wang, 203-622-7924, ywang@greenwichlibrary.org.

Julie Jason, JD, LLM, a personal money manager (Jackson, Grant Investment Advisers Inc. of Stamford, Connecticut) and award-winning author, welcomes your questions/comments (readers@juliejason.com). Please visit www.juliejason.com.

DISTRIBUTED BY ANDREWS MCMEEL SYNDICATION

Little did “Ivan” know that it would have been a good idea to record the cost bases (the original prices) of the five stocks his grandparents gave him 20 years ago, along with the cost bases of the dividends he reinvested in those stocks after receiving the gift.

Now that Ivan’s thinking of selling those stocks, the cost bases (showing up as all zeros on his brokerage statements) need to be researched and updated for tax purposes.

Why? To figure out capital gains taxes when the stocks are sold.

How? That’s the tough part. If you are in Ivan’s position, you’re pretty much on your own. It will be up to you to do some digging. You’ll need to go back in time to two periods, before and after the gift was made.

Step one is to confirm the number of shares of each stock received at the time of the gift.

Step two is to find out what the donor paid for the stock. In Ivan’s case, that’s the dollar amount his grandparents paid for each stock.

If Ivan’s grandparents filed a gift tax return at the time, there is your answer -- in the gift tax return you would find the basis, the number of shares and the date of the gift.

If there is no gift tax return, more is involved. The task at hand is to find the price paid by Ivan’s grandparents (the “carryover” basis). Things would be easier if the cost were based on the day that Ivan received the stocks, but that’s not good enough.

If Ivan can’t come up with this figure after doing research, the most conservative approach is to assume they paid nothing -- a zero cost basis. However, that’s taking an extreme position; zero is not the real cost basis, and taking that approach will trigger the highest tax liability.

Here is an example: Assume Ivan received 1,000 shares of stock A; he sells the stock for $100,000 ($100 a share). If we assume a zero cost (which you would not normally do), his gain would be $100,000.

On the other hand, if Ivan can demonstrate that his grandparents bought stock A for, say, $50 a share, his gain on the same 1,000 shares would be $50 a share, or $50,000.

If you are in Ivan’s situation, reach out to your accountant or tax adviser to help you design a way to be an efficient detective. The goal is to find the original cost or to build a case, with evidence, that supports a dollar figure that best represents the grandparents’ cost.

Now, let’s turn to additional shares Ivan purchased through dividend reinvestments.

Going back to stock A, assume that Ivan now has 250 additional shares above and beyond the original 1,000-share gift. He acquired these additional shares at different prices by reinvesting dividends when they were paid each calendar quarter over a 20-year period.

If the dividend reinvestments were done through a dividend reinvestment plan, the transfer agent for the stock will have a record. If the shares were deposited into a brokerage account, there may or may not be a record. Brokerage firms are now required to report purchase prices after 2011.

In any event, there is work to be done. Tax advisers will do their best to help guide your search. The scope of the search will depend on the amount of a potential gain. In de minimis (minimal) cases, you’ll do the best you can. When large dollar amounts are involved, you’ll have to weigh the cost of hiring professional help to figure out the cost bases.

You may be thinking, how can I avoid this fate if I receive a gift of stock? That’s easy. Keep good records.

This is the advice offered by Vanguard, one of the world’s largest investment management companies:

“An investor should always keep copies of statements and confirmations to accurately calculate cost basis. If reinvesting dividends and capital gains, keeping good records is especially important.”

For more information, read the IRS FAQs on cost basis, reinvested dividends and dividend reinvestment plans (tinyurl.com/yayqctbr).

Julie Jason, JD, LLM, a personal money manager (Jackson, Grant Investment Advisers Inc. of Stamford, Connecticut) and award-winning author, welcomes your questions/comments (readers@juliejason.com). Please visit www.juliejason.com.

DISTRIBUTED BY ANDREWS MCMEEL SYNDICATION

Did you know that, with the help of the IRS, you can file your 2020 tax return, possibly for free?

Now that it’s the second month of a new year, you may be eager to do your 2020 taxes, especially since the IRS recently began accepting and processing returns. Why not do that electronically on your tablet or smartphone, even if you are used to filing a paper return? No app is required to file, and electronic filing will help the IRS avoid paper processing in this time of COVID-19 and potentially avoid delays in you getting a refund.

This is what you need to know.

The IRS is ready to help you prepare your return. You may even qualify for free help through the IRS’ online Free File offering (tinyurl.com/y7lq2mn2), which includes electronic filing and even direct deposit of tax refunds the IRS owes you (tinyurl.com/y8tv3g42). To be eligible for free help, if you had an adjusted gross income (AGI) of $72,000 or less in 2020, you will have at least one free offering you can take advantage of. The service is not limited to simple tax returns; major tax forms can be filed electronically.

Free File is set up by the IRS with the help of brand-name tax software providers (called “Free File partners”), such as TaxSlayer, TurboTax and 1040Now. You’ll want to review your choices of different software vendors by using the lookup tool (tinyurl.com/s3yzqwz) on the IRS.gov website.

For example, to be eligible for TaxSlayer, you would need to have an AGI of $72,000 or less and be age 51 or younger (although you can be any age if you are eligible for the earned income tax credit, or EITC). TaxSlayer can file from any state of residence, and it can handle state income tax filings for 22 states and the District of Columbia.

The lookup tool will help you find whether a tax software provider also offers an income tax filing for the state you live in. For example, if you live in Georgia and have an AGI of $60,000, you will have up to three tax preparers to choose from for state income tax. Note that for some of the providers in the Free File Program, there is no free state tax preparation.

If you are a veteran, check out MilTax online software (tinyurl.com/yaavwa8f), offered through the U.S. Department of Defense, where certain veterans can do their taxes regardless of how much they made in 2020.

Let’s say you are ready to jump into Free File using your computer, smartphone or tablet. How do you do that? Use your device to log on to the Free File page of the IRS website (tinyurl.com/y7lq2mn2), and click the box titled “Choose an IRS Free File Offer.” On the next page, select “Start Lookup Tool.” From there, you’ll answer questions about your filing status, age, AGI, earned income tax credit, state of residence and military pay (if any), and then it will give you the results. If you want to do a quick scan of possible offers, you can fill out fewer details by selecting the “Browse All” link.

Before leaving the subject of tax returns, let’s talk about the economic impact payment. If you did not receive the payment that you are eligible for, it may be that you don’t normally file a tax return. If that’s you, take advantage of Free File as soon as possible to file a 2020 return and claim a Recovery Rebate Credit. According to the IRS (tinyurl.com/yb9bl29l), by filing electronically, “the tax software will ask you questions about your income, credits and deductions and will help you figure your Recovery Rebate Credit.”

Happy income tax filing!

On another note, if you are interested in the basics of retirement investing, join me for a virtual presentation, “Financial Planning for Retirement I: Plan for Good Times and Bad,” on Wednesday, March 3, at 1 p.m. EST, sponsored by the Greenwich (Connecticut) Library. To register, go to tinyurl.com/y79cp37l or contact Yang Wang, 203-622-7924, ywang@greenwichlibrary.org.

Julie Jason, JD, LLM, a personal money manager (Jackson, Grant Investment Advisers Inc. of Stamford, Connecticut) and award-winning author, welcomes your questions/comments (readers@juliejason.com). Please visit www.juliejason.com.

DISTRIBUTED BY ANDREWS MCMEEL SYNDICATION