February 11, 2018
Every week, Simply Money’s Nathan Bachrach, Ed Finke and Amy Wagner are answering your financial questions in The Cincinnati Enquirer. If you, a friend, or someone in your family has a money issue or problem, please feel free to send those questions to firstname.lastname@example.org
Carol in Liberty Township: Should I be worried about the stock market? What should I be doing with my money now that stocks are falling?
Answer: Yes, stocks have been falling over the last week or so. But that’s not what you should be focused on.
First, it’s important to remember that minor stock declines of five percent to 10 percent are normal. We just haven’t seen one in a while! In fact, the biggest stock decline in 2017 was just 2.8 percent. The last time there was a decline of more than 10 percent? All the way back in early 2016 – basically two years ago!
Because of this, any sort of stock declines are now going to feel gigantic. But when you see headlines saying things like “Stocks Plunge,” you need to keep it all in perspective. As we like to say, as an investor, your “cost of admission” when investing in the stock market is accepting the fact that stocks go up… and stocks go down.
The biggest risk to the stock market is an economic recession. That’s what typically kills stock rallies. At Simply Money Advisors, we look at a lot of economic data every day, and the good news is that the economy is still going strong with a very low risk of recession in the next six to nine months – we believe about a one percent chance. Likewise, corporate profits are about 15 percent higher on average compared to a year ago. Because of this, we believe the recent stock losses are just normal market turbulence.
The Simply Money Point is that if you’re invested in the stock market, that money should have a long-term goal. Any money that you need in the next few years should not be in the market – you don’t want to expose it to any unnecessary risk. Having a personalized financial plan can help keep you disciplined and focused on the long term, no matter what stocks might be doing in the short term.
Eddie: I inherited some P&G stock from my dad who recently passed away. What's my tax obligation going to be?
Answer: Stocks become taxed when you sell them. This tax is based on your capital gains, or how much money you’ve made with that investment. But inherited stocks play by some different rules.
First, the basics of “cost basis.” Let's say, 10 years ago, you purchased $5,000 worth of a stock and its value has now increased to $20,000. Your “cost basis” is $5,000, and if you decide to sell that stock, you would be taxed on the $15,000 of long-term capital gains.
However, when you inherit stock, you use what’s called a “step-up in basis,” or stepped-up basis. This means your cost basis is the price of the stock on the day of your father’s passing – it’s not what he originally paid for the stock. For example, using the same numbers as above, if he originally bought $5,000 worth of P&G stock and it was worth $20,000 when he died, your stepped-up basis is $20,000. This means you are not taxed on what essentially were your father’s gains. If you decide to sell the stock at some point, your loss or gain will be tied to that stepped-up basis of $20,000.
Another way inherited stock is different is that gains from the sale of the inherited stock will be classified as long-term capital gains, even if you sell the next day. For example, if you receive the stock with a cost basis of $20,000 and sell it a few months later for $25,000, you will be taxed on the $5,000 at the long-term capital gains rate. This rate is lower than the short-term (less than a year) capital gains rate, which is taxed as ordinary income.
If the executor of the estate filed an estate tax return you should be able to find the stepped-up basis on this document. If not, you can go to Yahoo! Finance or Google Finance to determine the share price of the stock on a specific day.
The Simply Money Point is that you will not have any tax obligations just for inheriting a stock due to stepped-up basis. You will have to pay a long-term capital gains tax if you sell the stock at any point and it has increased in value.
Responses are for informational purposes only and individuals should consider whether any general recommendation in these responses are suitable for their particular circumstances based on investment objectives, financial situation and needs. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing, including a tax advisor and/or attorney. Nathan Bachrach and Ed Finke and their team offer financial planning services through Simply Money Advisors, a SEC Registered Investment Advisor. Call (513) 469-7500 or email email@example.com.