The death of a spouse is one of the most difficult things imaginable. Besides the emotional toll, surviving spouses typically confront financial issues, which often trigger tax-related questions and consequences. Some of them are fairly straightforward, while others can be tricky. That's why Letha McDowell, president of the National Academy of Elder Law Attorneys, advises surviving spouses not to make major financial changes immediately. Instead, she tells them to reassess their finances from a tax perspective.
The loss of income after a spouse dies certainly has tax implications. For instance, if a drop in income means the surviving spouse needs to tap into a retirement account, McDowell points out that "the taxes may be less than initially anticipated because, if you have lower income, you may be in a lower bracket." Less income could also mean that the surviving spouse now qualifies for certain tax deductions or credits that have income caps or phase-out rules. Local jurisdictions often have income-based property tax breaks that may suddenly become available, too.
Eventually, every surviving spouse has a new filing status. A joint federal tax return is allowed for the year the deceased spouse dies if the surviving spouse didn't remarry. The qualifying widow(er) status may be an option for two more years if there's a dependent child. After that, a surviving spouse who doesn't remarry must file as a single taxpayer, which usually means less favorable tax rates and a lower standard deduction.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Inheriting a traditional IRA can also affect the surviving spouse's taxes, but first, there's a decision to make. An inheriting spouse can be designated as the account owner, roll the funds into their own retirement account, or be treated as a beneficiary. That decision will affect required minimum distributions and ultimately the surviving spouse's taxable income.
As either the designated owner of the original account or the owner of the account with rolled-over funds, the surviving spouse can take RMDs based on their own life expectancy. If the third option -- staying as the IRA's beneficiary -- is chosen, RMDs are based on the life expectancy of the deceased spouse. "Almost everyone either rolls [an inherited IRA] into their own IRA or at least they transfer it into an account in their name," McDowell notes.
"Consolidating makes things much easier to manage." The third option may make sense if the surviving spouse is at least 72 years old, but the deceased spouse wasn't. In that case, RMDs from the inherited IRA are delayed until the deceased spouse would have turned 72.
A surviving spouse also receives a stepped-up basis in other inherited property. "If the assets are held jointly between spouses, then there's a step up in one half of the basis," McDowell says. "But if an asset was owned solely by the decedent, then that would be a step up of 100%." In community property states, the total fair market value of property, including the portion belonging to the surviving spouse, becomes the basis for the entire property if at least half its value is included in the deceased spouse's gross estate.
There's also a special rule that helps surviving spouses who want to sell their home. In general, up to $250,000 of gain from the sale of a principal residence is tax-free if certain conditions are met. The exemption jumps to $500,000 for married couples filing a joint return, but a surviving spouse who hasn't remarried can still claim the $500,000 exemption if the home is sold within two years of the deceased spouse's death.
As for estate taxes, there's an unlimited marital deduction as well as this year's $11.7 million estate tax exemption (the amount is adjusted annually for inflation). If the deceased spouse's estate is nowhere near that amount, the surviving spouse should still file Form 706 to elect "portability" of the deceased spouse's unused exemption amount. This protects the surviving spouse if the exemption is lowered, as President Joe Biden and others have proposed doing. If that happens, "it's going to be important for a surviving spouse to have elected portability," McDowell warns. "And if you don't file, you don't get it."
-
New Law Delivers Tax Breaks to Natural Disaster Victims, But Is It Enough?Tax Relief The legislation provides critical tax relief to thousands of natural disaster victims across the country.
-
Why Birkenstock Is Still a Buy After EarningsBirkenstock shares are soaring Wednesday after the sandal maker beat expectations for its fiscal fourth quarter. Here's what Wall Street has to say.
-
457 Plan Contribution Limits for 2025Retirement plans There are higher 457 plan contribution limits for state and local government workers in 2025 than in 2024.
-
What Does Medicare Not Cover? Seven Things You Should KnowHealthy Living on a Budget Medicare Part A and Part B leave gaps in your healthcare coverage. But Medicare Advantage has problems, too.
-
13 Smart Estate Planning Movesretirement Follow this estate planning checklist for you (and your heirs) to hold on to more of your hard-earned money.
-
Medicare Basics: 11 Things You Need to KnowMedicare There's Medicare Part A, Part B, Part D, Medigap plans, Medicare Advantage plans and so on. We sort out the confusion about signing up for Medicare — and much more.
-
The Seven Worst Assets to Leave Your Kids or Grandkidsinheritance Leaving these assets to your loved ones may be more trouble than it’s worth. Here's how to avoid adding to their grief after you're gone.
-
SEP IRA Contribution Limits for 2024 and 2025SEP IRA A good option for small business owners, SEP IRAs allow individual annual contributions of as much as $69,000 in 2024 and $70,000 in 2025..
-
Roth IRA Contribution Limits for 2024 and 2025Roth IRAs Roth IRA contribution limits have gone up. Here's what you need to know.
-
SIMPLE IRA Contribution Limits for 2024 and 2025simple IRA The SIMPLE IRA contribution limit increased by $500 for 2025. Workers at small businesses can contribute up to $16,500 or $20,000 if 50 or over and $21,750 if 60-63.
