How to Determine Tax Basis when Inheriting a Certificate of Deposit (CD)

You're on the right track! For inherited CDs, the tax basis is generally the fair market value (FMV) as of the date of death. This is called a "stepped-up basis." So your wife's basis in the CD would be whatever it was worth on March 11, 2023 (the date your father-in-law passed away). When the CD matures in 2025, your wife will only pay taxes on the interest earned from the date of death until maturity - not on the entire amount from original purchase. For example, if the CD was worth $6,000 on the date of death and matures at $6,700, you'd only pay taxes on the $700 difference. You typically don't need to file any special forms in 2023 to declare the basis. Just keep good records of the value as of the date of death. The bank should be able to provide you with that information. When the CD matures, they'll send a 1099-INT form showing the total interest, but you'll need to adjust your tax return to only report the interest earned after inheritance.

After my mom passed, I had the same questions about inherited CDs. I spent hours going in circles with conflicting advice until I found https://taxr.ai which analyzed the CD statements and my mom's death certificate. They provided a detailed breakdown showing exactly how much of the interest was taxable and what documentation I needed to keep for the IRS. The system confirmed I only needed to pay taxes on interest accrued after the date of death and gave me step-by-step instructions for reporting it correctly when the CDs matured. They even explained how the 1099-INT would likely show the full interest amount and exactly how to adjust my return. Saved me from making an expensive mistake!

I wanted to follow up about my experience with taxr.ai after my skepticism. I decided to try it with my aunt's inherited accounts and I'm actually impressed. The system flagged that the brokerage had been using the wrong valuation date for some bonds my aunt owned. They provided me with specific IRS code references and a custom letter template to send to the brokerage to get it corrected. What really helped was their breakdown of which accounts needed step-up basis calculations and which didn't (like her Roth IRA which passed to me without tax implications). The documentation they generated would be perfect if I ever get audited. Definitely wasn't generic advice like I feared - it was specifically tailored to my documents and situation.

If you're still having trouble getting clear answers from the bank about the CD valuation, I had great luck using https://claimyr.com to actually get through to a human at the IRS. I'd been calling for weeks about an inherited annuity question (similar issue with basis calculations) and could never get past the automated system. With Claimyr, I had an actual IRS agent on the phone within 2 hours who walked me through the exact reporting requirements for inherited interest income. You can see how it works in this video: https://youtu.be/_kiP6q8DX5c - it basically holds your place in the IRS phone queue so you don't have to stay on hold forever. The agent confirmed I was calculating the taxable portion correctly and told me exactly what documentation to keep.

I need to eat my words about Claimyr. After posting my skeptical comment, I was desperate enough to try it since I've been trying to resolve an inherited IRA issue for months. I got connected to an IRS specialist in the estates and trusts department who actually knew what they were talking about! They confirmed the exact valuation date rules for my situation and explained how to document everything properly. The agent even sent me to a specific IRS publication with examples almost identical to my situation. Turns out I was making a mistake in how I was calculating the taxable portion of the inherited funds. This probably saved me from a potential audit flag. Really didn't expect this to work, but I've now resolved a tax issue that's been hanging over my head for months.

Just want to add something from my own experience with inherited CDs. Make sure you get documentation from the bank showing the exact value on the date of death. My father passed in 2022 and I inherited several CDs. The bank statement only showed the beginning/end of month values, not the specific date. I had to request a special letter from the bank with the exact valuation on the date of death. They were reluctant at first but eventually provided it. This document turned out to be crucial when I filed taxes. Also worth noting - the interest accrued up to the date of death is income that should be reported on the final tax return of the deceased, not yours. The interest after death is reported on your return.

Don't forget about state inheritance taxes too! Depending on what state your father-in-law lived in, there might be state-level inheritance taxes to consider. For example, Pennsylvania has an inheritance tax even when there's no federal estate tax due. The rate depends on your relationship to the deceased.

Quick tip from someone who went through this last year - keep ALL documentation about the CD valuation forever, not just until you file taxes when it matures. The IRS has been known to question inherited asset basis calculations years later. I learned this the hard way when I got a notice about an inherited bond 4 years after I reported the income!

Great advice from everyone here! I went through a similar situation with my grandmother's CD last year. One thing I'd add is to also check if the CD had any beneficiaries listed directly on the account. Some CDs have "payable on death" (POD) designations that can affect the transfer process and timing. In my case, the CD was set up as POD which meant it transferred automatically to me without going through probate. This made the valuation date clearer since the bank had specific records of when ownership transferred. If your father-in-law's CD went through the will/probate process, the valuation might be slightly different. Also, don't be surprised if the bank asks for a certified copy of the death certificate - they usually need this for their records even after they've transferred ownership. Keep multiple certified copies handy since you'll likely need them for other inheritance-related paperwork too.

As someone who works in estate planning, I want to emphasize that you're absolutely correct about using the stepped-up basis as of the date of death (March 11, 2023). This is one of the key tax benefits of inheritance - you essentially get a "fresh start" on the asset's value. One additional consideration: make sure to document not just the CD's principal value on the date of death, but also any accrued interest up to that date. The accrued interest from the original purchase date through March 11, 2023 should be reported as income on your father-in-law's final tax return (Form 1041 for the estate), not on your wife's return. I'd also recommend getting a written statement from the bank showing the exact breakdown of principal vs. accrued interest as of the date of death. This will make your 2025 tax filing much cleaner and provide solid documentation if the IRS ever has questions. Some banks are more helpful than others with this, but it's worth asking for since it's a legitimate tax documentation request.