First Midwest BankFirst Midwest Bank logoArrow DownIcon of an arrow pointing downwardsArrow LeftIcon of an arrow pointing to the leftArrow RightIcon of an arrow pointing to the rightArrow UpIcon of an arrow pointing upwardsBank IconIcon of a bank buildingCheck IconIcon of a bank checkCheckmark IconIcon of a checkmarkCredit-Card IconIcon of a credit-cardFunds IconIcon of hands holding a bag of moneyAlert IconIcon of an exclaimation markIdea IconIcon of a bright light bulbKey IconIcon of a keyLock IconIcon of a padlockMail IconIcon of an envelopeMobile Banking IconIcon of a mobile phone with a dollar sign in a speech bubbleMoney in Home IconIcon of a dollar sign inside of a housePhone IconIcon of a phone handsetPlanning IconIcon of a compassReload IconIcon of two arrows pointing head to tail in a circleSearch IconIcon of a magnifying glassFacebook IconIcon of the Facebook logoLinkedIn IconIcon of the LinkedIn LogoXX Symbol, typically used to close a menu
Skip to nav Skip to content
FDIC-Insured - Backed by the full faith and credit of the U.S. Government

The financial effects of losing a spouse

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.

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."

 

This article was written by Rocky Mengle from Kiplinger and was legally licensed through the Industry Dive publisher network. Please direct all licensing questions to legal@industrydive.com.

Subscribe for Insights

Subscribe