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What You Need To Know About Taxes After A Spouse Dies What You Need To Know About Taxes After A Spouse Dies
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What You Need to Know About Taxes After a Spouse Dies

Insights & Ideas Team •  April 27, 2015 | Your Finances

The loss of a loved one can have a ripple effect on all aspects of your life as a surviving spouse. With so many matters to handle during this emotional time, it can be easy to overlook financial concerns, including the tax implications.

“There are many tax issues for a surviving spouse to consider after the death of a spouse,” said Patrick Horning, CLU®, CFP®, an attorney and director of Advanced Planning at Northwestern Mutual.

Filing a Joint Tax Return

You can continue to file your taxes under the category of “married filing jointly” for one year (for two years if you have dependent children). This means you’ll be able to continue benefiting from the more taxpayer-friendly rules that apply to joint filers.

“One of the things that gets overlooked most is the change in tax bracket that can occur when a spouse dies,” said Horning. “Filing a joint tax return can be advantageous because single filers reach higher tax brackets sooner.”

For example, single filers with taxable income between $90,750 and $189,300 fall into a 28 percent tax bracket, according to 2015 IRS tax brackets. Married couples filing jointly are in the 28 percent bracket if they have combined taxable income between $151,200 and $230,450.

To file a joint tax return, you must have been legally married at the time of death, and you must not have remarried prior to the end of the year.

Readjusting Fair Market Value of Assets

If you and your spouse jointly owned real estate, stocks or other assets, you can readjust their basis for tax purposes. This can reduce the capital tax gains you pay on profits when you sell an asset. However, how much the basis is adjusted depends on whether you live in a community property state or a common law state.

In a community property state, each spouse owns all marital property jointly. If you live in one of the nine community property states, the entire basis of the community property is readjusted to the fair market value. The nine community property states are Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin.

If you live in a common law state, generally only 50 percent of the basis in jointly owned assets is readjusted to the fair market value as of the date of your spouse’s death.

Inherited Retirement Accounts

You may have inherited your spouse’s traditional IRA, Roth IRA or other qualified retirement plan account, such as a 401(k) account.

“The surviving spouse has several options when named as a beneficiary of a qualified retirement plan or IRA,” said Horning.

You can keep the retirement plan in your deceased spouse’s name and begin minimum required distributions when your spouse would have reached age 70½.

Another option allows you to exercise a spousal rollover that retitles the account in your name and requires minimum distributions when you turn 70½.

“This can be significant if the surviving spouse is younger than the deceased spouse because the survivor can keep the money in a tax-deferred account for a longer period of time,” he said.

Remember that the reverse is also true. If you’re under age 59½ and retitle the account in your name, you’ll be subject to the 10 percent penalty if you withdraw any funds before turning 59½. If instead of retitling the account you kept it in your spouse’s name, there would be no 10 percent penalty for withdrawals before you turn 59½.

Home Sale Exclusion

At some point, you may decide it’s best to sell the home that you jointly owned with your spouse to begin a new chapter in your life.

In that case, you can take up to a $500,000 tax-free exclusion on the sale of a home if that sale occurs within two years of your spouse’s death. Otherwise you are limited to the $250,000 exclusion allowed for single homeowners.

Adjusting to the loss of a loved one may be one of the toughest challenges you face in life. Understanding the tax implications after the death of a spouse can help lessen some of the financial stress you experience as you go through the grieving process.

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