Tag: U.S. Savings Bonds
Death (of a Spouse) and Taxes
November 16, 2021
In a “normal” year, about 1.5 million Americans become widows and widowers, but the COVID-19 pandemic has significantly increased that annual statistic. According to a recent article in The Wall Street Journal, the National Center for Family and Marriage Research at Bowling Green State University estimates that about 380,000 of the more than 700,000 people in the United States who have died from COVID-19 were married.
Under “normal” circumstances, it may be difficult to comply with tax requirements and deadlines; filing as a widow(er) presents additional challenges. This is a complex topic with the following issues to consider.
Filing the First Year
The IRS stipulates that the year that your spouse dies:
- You can still file a joint return if you didn’t remarry and the executor approves the joint return.
- If either spouse was a nonresident alien at any time during the year, the surviving spouse can’t file a joint return.
- If you do file jointly, include all your income and deductions for the full year, but only your spouse’s income and deductions until the date of death.
- If the deceased spouse owes any taxes that the estate can’t pay, you as the surviving spouse may be liable for the amounts owed.
Filing in the Next Two Years
For two tax years after the year your spouse died, you can file as a qualifying widow(er). This filing status gives you a higher standard deduction and lower tax rate than filing as a single person. You must meet these requirements:
- You haven’t remarried.
- You must have a dependent (not a foster) child who lived with you all year, and you must have paid more than half the maintenance costs of your home.
- You must have been able to file jointly in the year of your spouse’s death, even if you didn’t.
Notifying the IRS
If you are a widow(er) who qualifies to file a joint return, take the following steps:
- Across the top of your IRS Form 1040 tax return for the year of death—above the area where you enter your address, write “Deceased,” your spouse’s name, and the date of death.
- When you’re a surviving spouse filing a joint return and a personal representative hasn’t been appointed, you should sign the return and write “filing as surviving spouse” in the signature area below your signature.
- When you’re a surviving spouse filing a joint return and a personal representative has been appointed, you and the personal representative should sign the return.
- A decedent taxpayer’s tax return can be filed electronically. Follow the specific directions provided by your preparation software for proper signature and notation requirements.
- The deadline to file a final return is the tax filing deadline of the year following the taxpayer’s death.
- If you are a surviving spouse filing a joint return alone, you should sign the return and write “filing as surviving spouse” in the space for your deceased spouse’s signature.
- If a refund is due, there’s one more step. You also should complete and file with the final return a copy of Form 1310, Statement of Person Claiming Refund Due a Deceased Taxpayer. Although the IRS says you don’t have to file Form 1310 if you are a surviving spouse filing a joint return, you probably should file the form to prevent possible delays.
Other forms and documents you may need include:
- W-2s, 1099s and other tax forms for the year of death, reporting income or expenses paid before the person died.
- Death certificate to prove the date of death in the tax year being reported.
- Form 56 filed by a trustee, executor, administrator, or other person to let the IRS know who is responsible for the person’s estate.
- Form 1041, “U.S. Income Tax Return for Estates and Trusts” reports receipt of more than $600 in annual gross income (such as dividends, interest, proceeds from the sale of assets) after the person died.
- IRS Publication 559, “Survivors, Executors and Administrators” provides more information about legal requirements.
Note: You can’t file a final joint return with your deceased spouse if you as the surviving spouse remarried before the end of the year of death. The filing status of the decedent in this instance is married filing separately.
Filing an Estate-tax Return
The current estate- and gift-tax exemption is $11.7 million per individual, so not many estates owe tax—only about 1,900 did for 2020, according to the Tax Policy Center. Executors don’t need to file a return if the decedent’s estate is below the exemption.
They may want to file one, however, because then the surviving spouse can have the partner’s unused exemption and add it to their own in many cases.
Estate taxes are normally due nine months after the date of death. But the IRS allows executors to claim the unused exemption for the spouse up to two years after the date of death, in many cases.
Selling a Home and Resulting Exemptions
Survivors who sell a home may take up to $500,000 of home-sale profit tax-free if they haven’t remarried and sell within two years of the partner’s date of death. If they sell later, the exemption drops to $250,000, the standard amount for single filers.
Dealing with Retirement Accounts
Surviving spouses can roll over inherited retirement accounts such as 401(k)s and IRAs into their own names, and financial advisers routinely recommend this move.
A new widow(er) should carefully consider options. It’s possible to divide retirement accounts such as IRAs, and to roll over some but not all assets into the survivor’s name. This would leave the remainder in an inherited IRA available for penalty-free payouts to younger spouses.
Either way, heirs of retirement accounts should be sure to name new heirs of their own.
Heirs of these accounts who will face higher taxes as single filers may also want to convert assets to Roth IRAs, which can have tax-free withdrawals—especially if they can convert while still eligible for joint-filing rates and brackets.
Cashing U.S. Savings Bonds
There’s a special rule for U.S. Savings Bonds, from which income generally accrues tax-free until the bonds are cashed in. When the bond owner dies, the accrued interest may be treated as income in respect of a decedent.
In that case, the new owner of the bonds becomes responsible for the tax on the interest accrued during the life of the decedent. (The tax isn’t due, however, until the new owner cashes in the bonds.)
Alternatively, the interest accrued up to the date of death can be reported on the decedent’s final income tax return. That could be a tax-saving choice if he or she is in a lower tax bracket than the beneficiary. If that method is chosen, the person who gets the bonds only includes in income the interest earned after the date of death.
All deductible expenses paid before death can be written off on the final return. In addition, medical bills paid within one year after death may be treated as having been paid by the decedent at the time the expenses were incurred. That means the cost of a final illness can be deducted on the final return even if the bills were not paid until after death.
If deductions are not itemized on the final return, the full standard deduction may be claimed, regardless of when during the year the taxpayer died. Even if the death occurred on January 1, the full standard deduction is available.
Inheriting Property and Money
For deaths that occurred in years other than 2010, the tax basis of any property a taxpayer owns at the time of his or her death is “stepped up” to its date-of-death value. Since the basis is the amount from which any gain or loss will be figured when the new owner ultimately sells the property, this means that the tax on any appreciation that occurred during the taxpayer’s life is essentially forgiven.
The person who inherits the property—a house, say, or stocks and bonds— would owe tax only on appreciation after the time of death. It’s important that you pinpoint date-of-death value as soon as possible—the executor should be able to help—to avoid hassles later on when you sell it. If assets have lost value during the original owner’s life, the tax basis is stepped down to date-of-death value.
Money you inherit is generally not subject to federal income tax. If you inherit a $100,000 certificate of deposit, for example, the $100,000 is not taxable. Only interest on it from the time you become the owner is taxed. If you receive interest that accrued but was not paid prior to the owner’s death, however, it is considered income in respect of a decedent and is taxable on your return.
The death of a spouse not only presents emotional distress resulting from the loss of a loved one, but it also forces a widow(er) to deal with income tax issues never before faced. By keeping at insureyouknow.org, copies of a spouse’s death certificate, medical bills, income records, property assessments, and wills, you’ll be able to access required documents when you file your income tax return following the death of a spouse.