Tax Issues for new Widows and Widowers

It’s a traumatic experience to lose a spouse. While there is little that can be done to replace this physical and emotional loss, the Tax Code provides some relief for newly widowed taxpayers. Here is a summary of some of the tax breaks for the newly widowed:

Filing Status

In the year that taxpayers lose a spouse, they may still file a joint return, which should yield the most favorable tax rates and the largest standard deduction. A widow or widower may claim a full exemption amount for a spouse regardless of when the death occurred during the year. Taxpayers may file as a “qualifying widow or widower” if they have any cohabitating dependent children for the first two years after a spouse’s death. This filing status allows taxpayers to utilize joint-return rates, but disallows the use of any exemption for the decedent-spouse. Beginning in the third year after a spouse’s death, taxpayers may claim “head-of-household” status if there is a cohabiitating dependent child present. In this situation, while tax rates are less favorable than the rates for joint filers and qualifying widows and widowers, they are still more favorable than the rates for single filers.

Tax-free Inheritance

Property inherited from a spouse is generally tax–free. Inherited retirement account withdrawals are taxed as if the decedent-spouse was alive and making withdrawals. Depending on whether it is a traditional or Roth IRA, withdrawals may be fully taxable. (They are not taxable in the latter case.) Widows and widowers that are beneficiaries of commercial annuities purchased by a spouse will have a portion of each payout taxed as it would for a living spouse.

Stepped-Up Basis

The tax basis of most assets inherited from a spouse is stepped up to the property’s value on the day of the decedent’s death. The basis is the amount from which gain or loss is calculated upon sale of the asset, this means that tax on any appreciation prior to the death is forgiven. If investments are owned jointly between spouses, at least 50% of the basis is stepped up to the date-of-death value. This percentage may be 100% in a community-property state.

Selling Your Home

If a widow or widower sells the family residence within two years of the day of the decedent-spouse’s death, a single homeowner may take up to $250,000 of profit on the sale of a home tax-free. To qualify for this break, the home must have been resided in for two of the five years immediately leading up to the sale.

Rental Property

Inherited rental property from a spouse steps-up basis thus increasing any claimed depreciation deductions. Of course, this higher basis will reduce taxable capital gains upon sale.

Life Insurance

Life insurance proceeds are tax–free regardless of who paid the premiums, even if it was the spouse’s employer.

Inherited IRAs

Widows and widowers receive tax breaks for inherited individual retirement accounts. Taxpayer-spouses that are named beneficiaries of an IRA may treat it as their own IRA. For traditional IRAs, there are no minimum distributions until age 70½. For Roth IRAs, distributions never have to be taken. Taxpayers younger than 59½ may withdraw funds from an inherited IRA without paying the 10% penalty for early withdrawals.

If you are newly-widowed and need experienced and compassionate legal assistance, call THE TAX EXPERTS at the Thorgood Law Firm For a FREE consultation call 212-490-0704Tax Issues for new Widows and Widowers

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