Nothing is certain except death and taxes—and that widows and widowers will discover that the former makes the latter more challenging.
In most years, households can use the previous year’s tax return as a template for the current year. That’s not how tax time tends to go in the years following the death of a spouse—widows’ and widowers’ returns often are altered in unexpected ways. There’s also a 50/50 chance that the spouse who must cope with these challenging changes isn’t the one who handled the household’s tax returns in prior years.
Here are seven tax details worth knowing if you—or someone you care about—recently has been widowed…
Your filing status might not be obvious for a few years. Widows/widowers can file as “married filing jointly” for the year of death, even if the deceased spouse died very early in that year. Example: If a spouse died in January 2022, the surviving spouse could file as “married filing jointly” on the 2022 tax return that’s due April 17, 2023 (April 15, 2023, is a Saturday)—even though by that time the surviving spouse actually will not have been married for 15 months. Reminder: Write “filing as surviving spouse” on the line of this return where the deceased spouse would have signed.
You may be able to file as “qualifying widow/widower” for the two years immediately following the year of your spouse’s death—but only if you have a child or stepchild whom you claim as a dependent on the return…and you paid more than half the cost of maintaining a home that served as that dependent child’s main home for the entire year. Claiming qualifying widow/widower status almost certainly is your best option—you’ll get to use the tax-bracket thresholds of a married couple filing jointly rather than the significantly lower thresholds of a single person. Example: In 2022, the 22% tax bracket kicks in at $41,775 for singles…but $83,550 for couples. Exception: You cannot file as a qualifying widow/widower if you are remarried for any portion of the year—but if you remarry, you can file as married filing jointly with your new spouse.
Where you report the deceased’s final income depends on what day it’s received. Any income received by the late spouse on or before the date of death should be included on the couple’s joint income tax return for that year. But income payable to the late spouse after the date of his/her death is not considered income for the deceased—it’s considered income for the deceased’s estate and instead should be reported on IRS Form 1041, US Income Tax Return for Estates and Trusts. Reporting income on Form 1041 rather than the couple’s joint return often works to the surviving spouse’s benefit—most estates have relatively little income, so they generally land in low tax brackets.
Warning: Form 1041 typically is not required by the IRS if the estate has less than $600 in income. Problem: Failing to report income—even small amounts of income—still can attract IRS attention. When an estate has less than $600 in income, include a note with the final married-filing-jointly return explaining that the small amount of income not reported on the joint return was earned by the late spouse’s estate. Or complete and file a form 1041 even though it’s not required and the tax due is $0.
You’re at risk of losing your late spouse’s capital losses. Taxpayers can deduct no more than $3,000 in net capital losses on a tax return, but they generally can “carry over” any losses above $3,000 and apply them to future tax returns. Catch: If the taxpayer who incurred the losses dies, his/her surviving spouse cannot continue to carry over these losses beyond the couple’s final joint return. But there still could be a way to avoid losing the losses entirely. Example: A married man who is terminally ill has $20,000 in net capital losses in 2021. He deducts $3,000 of his losses that year, leaving $17,000 to carry over to future returns. If this man dies in 2022, his widow can deduct another $3,000 against ordinary income on the couple’s final married-filing-jointly return, leaving $14,000 in net capital losses that cannot be carried over any further. Her best option might be to sell appreciated assets to realize $14,000 in capital gains before the end of 2022.
No more than $3,000 of capital losses can be used to offset ordinary income in any year, but there’s no limit to the carryover capital losses that can be used to offset capital gains. This carryover issue is most problematic for widows and widowers when the losses are in accounts held solely in the deceased person’s name. When the losses are in joint accounts…or from a mix of accounts held in each spouse’s name…it often is possible to continue to carry over some or all of them. But: This can get complicated—discuss the matter with a tax preparer before the end of the calendar year in which the spouse died. Don’t wait until tax-prep season early the following year or some options might already be lost.
You can lock in your deceased spouse’s unused estate-tax exemption. If your spouse dies in 2022 leaving an estate worth less than $12.06 million—that’s the current gift-and-estate-tax-exemption amount—you might think there’s no need to file IRS Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return. While it’s true that no federal estate tax likely is due and this form probably is not required, failing to file it could cost your heirs a lot of money down the road. Reason: Form 706 doesn’t only report estate taxes due, it also can “lock in” the unused portion of the lifetime estate-tax exemption of the first spouse to die, essentially doubling the size of the estate that can be passed to heirs when the second spouse dies. If the couple’s total estate is less than $12.06 million, this, too, might seem unnecessary—the surviving spouse’s exemption alone seems sufficient to make estate taxes a nonfactor. But that isn’t necessarily so. The government could dramatically lower the estate-tax exemption before the second spouse dies…and/or this surviving spouse’s estate could increase dramatically during the remaining years of his/her life.
You might have to take a postmortem IRA distribution. Owners of traditional IRAs typically must make required minimum distributions (RMDs) from their accounts each year starting with the year they turn 72. Failing to do so can trigger massive penalties—50% of the amount that was supposed to be withdrawn. And when RMDs are required, the IRS does not accept death as an excuse for not taking them—if the IRA owner hadn’t gotten around to taking that year’s RMD before dying, the widow/widower or heir listed as IRA beneficiary must do so. Exception: The “required begin date” for RMDs is April 1 of the year following the year in which the IRA owner turns 72. If the IRA owner dies before that date, the widow or heir is not required to take an RMD on the deceased’s behalf, even if the IRA owner was 72.
Don’t wait until the tax-filing date approaches to discuss RMD options with your tax preparer—RMDs often must be taken by the end of the calendar year. RMDs for owners do not apply to Roths.
You don’t owe taxes on life insurance death benefits—with one potential caveat. You might already know that the death benefit from a life insurance policy need not be reported as income. What some widows/widowers don’t realize is that if the insurance company pays any interest on that death benefit—perhaps because part or all of it was not immediately paid out upon death—then that interest is subject to income taxes and should be reported on a Form 1099 and on Schedule B, Interest and Ordinary Dividends.
A key decision might have to be made about a highly appreciated home. Home prices have shot up in recent years, leaving many homeowners with properties worth much more than they originally paid. That doesn’t necessarily mean that they’ll be hit with big capital gains tax bills when they sell—married couples filing jointly typically can exclude up to $500,000 in capital gains from the sale of a primary residence from their taxes…single people, up to $250,000. But this does leave some widows/widowers facing an important deadline—if the $250,000 single-taxpayer exclusion won’t fully cover their capital gains, it could behoove them to take advantage of the full $500,000 exclusion while they still can.
Some good news: They don’t have to make this decision immediately. Widows and widowers can claim the full $500,000 exemption up to two years after the date of death or until the surviving spouse remarries, whichever comes first. More good news: There might be less of a capital gains tax looming than expected. If the home was jointly owned, the half of its value that’s considered to have belonged to the now-deceased spouse receives a “step-up in basis”—that is, for the purposes of calculating capital gains, its cost basis is increased to its value on the date of death. In community property states, the entire value of the home can receive this step-up. There has been some talk in Washington of eliminating the step-up in basis, but as of early 2022, that had not yet occurred.
