The fact is, when a spouse dies, about two-thirds of surviving spouses are women. While some are able to avoid major mistakes, taxes are a source of frustration and rife with potential problems. Tax filing advice when a spouse dies, especially regarding deadlines, is especially important, according to the article “The Death of a Spouse is Hard. Taxes Makes It Harder” from The Wall Street Journal.
The combination of emotional upheaval and needing to make complex decisions is overwhelming. Some widows need cash and are forced to sell the family home within two years to get an exemption of $500,000 on the sale proceeds. If you miss the deadline, the exemption shrinks to $250,000.
Others will convert traditional IRAs to Roth IRAs in the year their spouse dies, to capture lowered taxes on the conversion.
However, in all cases, spouses need to check withholding or estimated taxes, especially if the spouse who died was the one who made payments to the IRS. Underpayment penalties add up fast.
Here are some key things to watch for:
Filing an estate tax return. The current estate and gift-tax exemption is $11.7 million per person, so most people don’t need to pay federal estate tax. Executors don’t need to file a return if the decedent’s estate is below exemption levels. However, they should. Here’s why: filing an estate tax return will allow the surviving spouse to have the partner’s unused exemption and add it to their own. Claiming the unused exemption could have larger implications in the future when exemptions change.
Estate taxes are normally due nine months after the date of death. The IRS allows executors to claim the unused exemption for the spouse up to two years after the date of death, but the estate tax must be filed within the time period.
The year a spouse dies is the last year a couple may file jointly. Afterwards, the survivor files as a single person or if there are dependent children, as a surviving widow or widower. Be careful about the shift from joint to single filer. The surviving spouse’s tax rate may stay the same or rise when their income drops. There’s an expression for this, as it occurs so often: the widow’s penalty.
Surviving spouses may roll over inherited retirement accounts into their own names. However, if there is a significant age difference, this may not be the best strategy. New widows and widowers should consider their options carefully.
Filers must send the IRS 90% of their total tax for the year by December 31. This amount is often divided unequally between spouses. If the partner who died paid most of the withholding for estimated taxes, the survivor may need to make changes or risk underpayment penalties when taxes are paid in April. This is especially likely to occur if the spouse died early in the year.
If you know of someone facing this situation, the best advice you could give them would be to seek advice from a CPA or experienced tax consultant. Tax filing advice when a spouse dies can educate widows and widowers about using their spouse’s exemption, save them from penalties, and more. And when it comes to their own estate plan, an experienced law firm like Beck, Lenox & Stolzer is strongly advised as well.
Reference: The Wall Street Journal (Oct. 29, 2021) “The Death of a Spouse is Hard. Taxes Makes It Harder”