The last thing anyone wants to think about when dealing with the loss of a spouse is taxes. Coping with the loss of a loved one is stressful enough. Not knowing what to do regarding finances and taxes presents yet another burden. If you are newly widowed, there are a few questions you may have regarding finances and potential tax breaks.
Filing for qualifying widow(er) status provides you the same exemption as if you were filing married jointly. You can usually file as a qualifying widow(er) if you meet the following requirements:
Joint tax return eligibility – If you were able to file a joint tax return prior to your spouse’s death, then you are a qualified widow(er). The only requirement for filing a joint tax return is that you are legally married.
Length of time since spouse’s death – You can file as a qualified widow(er) for two years after the tax year in which your spouse passed.
Remarried – You cannot file as a qualified widow(er) if you remarry in the same tax year in which you are filing.
Dependent child – You must have a qualified dependent to be recognized as a qualified widow(er). The dependent must be your child or stepchild, be under the age of 19 or a full-time student under the age of 24.
Household costs – You must have paid at least fifty percent of the cost of maintaining the home in which you and your dependents live. Costs include property taxes, rent, utility, insurance, food, household expenses, etc.
According to the IRS, life insurance proceeds you receive as a beneficiary aren't includable in gross income, and you don't have to report them. However, interest and cash transfers complicate this rule, so it is best to discuss this with a tax professional.
When you inherit your spouse’s IRA, you can choose to roll the account into your own IRA or move it into an inherited IRA. Consider the following when discussing this with your financial advisor:
Are you younger than 59 ½ and need access to the money? You might want to remain a named beneficiary of your spouse’s IRA so you can tap the account without penalty. If you choose this route, you must retitle your spouse’s account to an inherited IRA to be a named beneficiary. You will be required to take an annual minimum distribution, and any funds you take out will be subject to income tax, but no penalty. You can then take the IRA as your own after you reach 59½.
Are you younger than 70 ½ and don’t need access to the money? In this case, you might want to make the IRA your own IRA. You won’t be required to take minimum distributions until you turn 70 ½.
The grimly named Angel of Death tax loophole is a part of the tax law that allows stepping up the value of property you receive from the death of your spouse.
Estate property value – Under the Angel of Death tax loophole, estate property is valued at its fair market value on the date of your spouse’s passing. Thus, you would only pay capital gains income tax on increases in value after your spouse’s death. Jointly owned property would be eligible for a step-up on the portion owned by the deceased spouse.
There is a special rule for widow(er)s that sell their family home within two years of the day their spouse passed away.
Home-sale profit – Homeowners living in a home for two of the five years leading up to its sale can benefit from home-sale profits. Single homeowners can keep up to $250,000 of the profit on the sale of a home tax-free. For married couples, the tax-free amount is doubled to $500,000. For widow(er)s and their deceased spouse who met the “two of five years” test, the $500,000 exclusion is available to the surviving spouse within two years of the spouse’s date of death. Remember also that if the house was owned jointly that the basis of the home will change based on the spouse’s date of death.
The property you inherit from your spouse’s death is generally income tax-free. However, insurance products such as annuities will be subject to income taxes on gains and may be subject to special rules.
The passing of a spouse can be heartbreaking. Trying to deal with taxes in the midst of grief can be overwhelming. It’s important to get help on important decisions at this time. Your trusted financial advisor can help you determine your best opportunity for tax breaks after the loss of your spouse.
Wood Smith Advisors, a woman-owned Registered Investment Advisor (RIA), is a fee-only financial services firm that partners with its clients to simplify their financial lives. We focus on women, entrepreneurs and individuals with complex financial situations, providing objective and competent advice, education and services to help them develop and build their businesses and reach their financial goals. We can be reached by clicking here.
“Finance Made Simple” blog posts are intended for educational purposes and not for specific advice. Each person’s situation is different. Consult your financial advisor for advice relating to topics discussed.