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. Siding with caution, it is recommended to reassess 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, the taxes may be less than initially anticipated because, if you have a 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.
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 beneficiary, is chosen, RMDs are based on the life expectancy of the deceased spouse.
Consolidating makes things much easier to help 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 spouse would have turned 72.
There is 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. As for estate taxes, there is an unlimited marital deduction.
Losing a spouse is devastating. We recommend that newly widowed spouses seek guidance from a financial professional.