Losing a spouse is one of the most difficult experiences you can go through in life. Along with the grief, pain and uncertainty, recent widows/widowers must also manage legal and financial matters, including complex decisions regarding taxes.
The tax team at Accountability Services offers our condolences and this simple guide to help you better understand your tax filing status options.
Importance of choosing the correct filing status
Tax filing status will influence your tax rate, standard deduction and available tax breaks. In some cases, determining which status works best may easy, but comparing outcomes for married filing jointly vs. married filing separately following the passing of a spouse is typically quite complicated and requires the help of a CPA.
Filing the year of your spouse’s death
For tax purposes you will be considered married for the entire year of your spouse’s death. In most cases, you are allowed to file jointly for this year. A notable exception is when you are not the executor of your spouse’s will and the executor does not agree to a joint filing.
You always have the option to file separately if it is in your best interests to do so.
Weighing the advantages and disadvantages of each status
Do not presume that filing jointly is automatically the right choice. It is imperative to determine owed taxes for both filing statuses before making a final decision. These calculations can become complex very quickly, which is why we recommend professional guidance.
Some of the factors that must be accounted for include:
- Deceased spouse’s income and deductions are only calculated up until their death
- If the deceased spouse has capital losses, you may wish to file jointly to offset the surviving spouse’s capital gains as unused capital loss carryover expires after death
- If you file jointly, you will be able to take the full $500,000 gain exclusion when selling your primary residence for up to two years
- Filing jointly may yield higher tax rates and limit certain itemized deductions if the deceased spouse was the higher earner
- Certain property not owned jointly can affect taxes owed depending on filing status
- Step-up-basis may be available for the inheritance of certain assets by the surviving spouse
- Favorable RMD (Required Minimum Distribution) rules may apply to inherited IRA or retirement plans
Filing the year after your spouse’s death
For the next tax year after losing your spouse, you will not be allowed to file jointly. You may, however, be able to file as a Qualifying Widow(er) and enjoy the same tax rates as a joint return along with the highest standard deduction.
To qualify, you must:
- Have a dependent child, stepchild, or adopted child (but not a foster child)
- Pay for more than half the upkeep of this child’s permanent home
- Not remarry
You may file as a Qualifying Widow(er) for up to two years.
Note that in the event the surviving spouse remarries within the same year, it is not possible to file a joint return with the deceased spouse. In this case, the surviving spouse will file a joint or separate return with their new spouse and the deceased spouse’s final return will be filed as married filing separately.
We are here for you
When you are ready to talk about the tax implications of losing your spouse, our team is here for you. We will explain filing options for your unique situation and future plans, and help you make the “right” choice for tax efficiency as you navigate this difficult time.
To schedule a consultation, simply fill out our online contact form.
For more information on signing a deceased spouse’s return and required documentation, read “How to file a final tax return for someone who has passed away” at IRS.gov.