Help Your Clients Avoid Paying Taxes They Don’t Really Owe

While the federal government probably doesn’t collect all lawfully owed tax dollars due to its own inability to fully validate every taxpayer’s claimed write-offs, it also collects a lot of tax revenue to which it’s legally/factually not entitled.

I know what you’re thinking; how does the IRS actually collect and retain tax revenue that isn’t actually owed? The answer is the IRS really doesn’t know it isn’t entitled to these revenues. And it’s costing your clients money! Now that I have your attention, let me elaborate.

In the IRS code (in summarized fashion), it states that the cost basis of an inherited asset takes a step-up in basis to the fair market value (FMV), based on the date of death of the asset’s owner (with, of course, a few exceptions beyond this article’s scope). So what does that mean in the context of the government collecting tax revenues it isn’t owed? Here’s one of many examples that will hopefully help you save your clients’ tax dollars.

Let’s say John and Jane are married and invested money in a joint right of survivorship investment account, held at a major custodian. Sadly, John passes away on November 15, the day the account value is roughly $1 million, with a cost basis of $500,000. With this kind of account, the funds are legally transferred 100% to Jane immediately following John’s death.

After a few months, Jane has all the assets moved to her new, individually owned account at the same custodian. She then quickly decides to sell all the investments while it’s still roughly worth $1 million, so she can invest the money elsewhere. She’ll receive a 1099-Barter Proceeds statement to report the million dollar gross proceeds sale for tax purposes.

Here’s the issue: Because custodians are not legally required to do so, I’ve noticed that in most cases, they don’t adjust the cost basis to reflect John’s date of death step-up to the FMV for the benefit of Jane.