Separating sales of stock from 1099-B to final and estate tax returns

[Yrags]

Hi,

A client died in 2021. From his consolidated 1099, there were numerous stock sales. Am I assuming correctly that for sales prior to his date of death, I enter only those on his final return, and for sales after death, I calculate the basis as of the date of death and enter those on the 1041, Sch D? Would they then all be short-term (acquired at date of death and sold before end of year)? And how does the IRS understand that some proceeds are left off of his return because they are placed on the estate return?

Thanks.  

[Gail in Virginia]

If all of the sales are reported under his social security number on the same consolidated 1099B, then I would report them all on his final tax return.  HOWEVER, i would report as nominee on all of the sales after his date of death so that the return shows no gain or loss on those sales and instead they are carried to the estate's 1041. 

Yes, the basis would be the value on the date of death but the holding period for inherited assets is assumed to be long term even if it sold as soon as it is transferred.  At least, this is how i would handle it. 

[Lion EA]

Inherited is Long-Term by definition.

If everything is in your client's SSN, you could include everything and then a line to subtract those reported on the 1041 with an appropriate description, including the tax ID of the 1041. Your software probably has a preferred method, a best practice.

[Catherine]

Everything Gail & Lion said. Inherited is defined as long-term. 

[Sara EA]

You have to enter the entire proceeds, cost, etc from the consolidated 1099 as usual.  On the next line I put "IRD reported by EIN XXXXXX" and enter the totals pertaining to the sales that occurred after death as negative amounts.  Stick with the costs reported on the 1099 here, as you just want to end up with the gains/losses from before death    On the 1041, I enter the brokerage name and "IRD reported to [deceased's SS number]."  Use the date of death value as the cost.

You have to do the same thing with the dividends and interest if any.  Be aware that any dividends paid after death on a stock that is later sold may be short-term if the div was reinvested into the stock after death.  I charge A LOT for these returns.

[Catherine]

Also note that if you want to be persnickety, many dividends (and cap gain dists) are weighted towards end-of-year payments, so to be correct you can't just apportion. You actually have to look at the dividends paid with each monthly or (usually) quarterly or semi-annual payment. Only payments before DOD are taxed on the final 1040; the rest go on the 1041.

Yes, the only thing to do is to charge a lot for these returns. They are pains-taking.

[Yrags]

Thank you everyone. As for the dividends, I did actually enter them as per the dates paid rather than apportion them. 

[Sara EA]

You have to enter ALL the divs reported on the 1099 and then back out the ones received after death.  Otherwise the computer matching will result in a letter from IRS.