Important Tax Planning Considerations After The Death Of A Spouse

Important Tax Planning Considerations After The Death Of A Spouse

May 29, 2024

Thinking about taxes after the death of a spouse is probably not a high priority given everything there is to process. However, this life event can dramatically change your tax status and overall financial situation. If you know what to expect, you can create a tax-efficient plan to help preserve your assets. How does the death of a spouse affect taxes?

Widow’s Penalty

With what's been called the "widow's penalty," surviving spouses can bear a greater tax burden even if their income has decreased.

When a spouse dies, the surviving spouse will become a single filer, which could be jarring after being used to married filing jointly. For example, a taxable income of $90,000 for someone who is married filing jointly falls into the 12% marginal tax bracket, based on 2024 tax rates. That same income for a single filer would be in the 22% bracket. Single filers also have a lower standard deduction—$14,600 for single filers under the age of 65 compared to $29,200 for married joint filers of similar age.

You can file jointly in the year of your spouse's death unless you remarry. However, after the year of death, you'll file as a single taxpayer, unless you are a qualifying widow(er) with a dependent child. This may create a one-time opportunity for taking on income in the year of death while the rate is lower through such means as realizing capital gains, converting IRA assets to a Roth IRA, or drawing other income that may have been deferred.

Handling bank, investment and retirement accounts

Tax rules for inherited accounts vary by type. Consider all your options for receiving funds from any account and understand how they may impact your taxes.

After bank accounts and real estate, IRAs are probably the next most common asset to inherit. Only the spouse of the deceased has the option to rollover an inherited IRA into their own IRA or keep it separate as an inherited IRA. If it is rolled over into their own IRA, spouses are generally able to stretch distributions over their remaining life expectancy, thus possibly reducing the amount of taxes that are paid each year. Other beneficiary types must empty the IRA account within 5 or 10 calendar years starting with the year after the death of the original owner.

Potential estate and real estate tax implications

An estate valued at more than the federal exemption, $13.61 million in 2024, could be taxed between 18% and 40%. If your state has an estate or inheritance tax, you'll also need to factor that into your financial plan. These taxes are typically due within nine months of a spouse's passing.

You can make the election to use your deceased spouse's unused exemption (called ‘electing portability’) when you file their estate tax return. Even if you don't have to file an estate tax return, you may be able to separately elect to use the unused exemption within 5 years. Plan for possible estate tax as it may be advisable to file a federal estate tax return to elect portability, even if the estate is below the filing threshold. Thresholds are subject to change over time.

If you're planning to sell your home after your spouse's passing, their separate home seller's exemption (each spouse gets a $250,000 exemption) that avoids taxes on capital gains will apply for two years after death, provided that you have not remarried in the interim. After that time period, the exemption is lowered from $500,000 to $250,000 for a single person.

Action Checklist

- Have a financial planner who provides income tax planning help you decide if any income should be accelerated into the year of death.
- Determine eligibility for qualifying widow (or widower) filing status for the following two years after death.
- Check company benefits that may be available to a surviving spouse, such as life insurance, pension, or retirement benefits.
- Make a plan for inherited IRAs and other accounts, including when to take Required Minimum Distributions (RMDs), if applicable.
- Within the first two years, evaluate if you possibly want to move and sell your home.