Dealing with the loss of a loved one is devastating. We can never prepare for it, and moving on in life is extremely difficult to do. Financially, there are also repercussions, and they don’t just have to do with the loss of the spouse’s income. Later down the road, there are also income tax issues, which are often unforeseen. Let’s take a look at how the death of a spouse will affect the survivor’s income taxes.
In the year of the spouse’s death, the survivor is considered by the IRS to have still been married. Regardless of if the spouse dies on January 1 or December 31, the survivor can file as Married Filing Jointly or Married Filing Separate on the income tax return. In the subsequent two years after the death of the spouse, the survivor, if still unmarried, can file as a Qualifying Widow(er). A Qualifying Widow(er) gets the same tax rates as a Married Filing Jointly/Married Filing Separately filer, but does not get to claim the deceased spouse as an exemption – reducing the deduction by $12,400 for 2020 taxes (it’s even more if the deceased spouse was over 65, blind, or both). Therefore, if the surviving spouse’s overall income tax rate was 25% and remained in the same bracket as the previous year, that’s a $950 increase in federal taxes when filing as a Qualifying Widow(er).
If still unmarried after the two year period where the surviving spouse can qualify for Qualifying Widow(er) status, then the survivor must file as either a Head of Household—if there are still dependent children—or a Single filer. For 2020, the standard deduction amount for Head of Household is $18,650 and for Single filers, it’s $12,400. That’s a $6,150 reduction in deductions for Heads of Household and a $12,400 reduction in deductions for Single filers. Assuming the same 25% tax rate, then that’s an increase in taxes of $1,537.50 for the Head of Household status and $3,100 for Single filers.
Traditional IRAs in the deceased spouse’s name also may affect the income taxes owed. Normally, inherited property doesn’t create a tax consequence, as the basis is usually stepped up to market value or to the adjusted basis; however, if the deceased spouse would have had to pay taxes on the distributions, then the surviving spouse will still have to pay taxes on those distributions.
While the tax consequences of the death of a spouse are straightforward, it is usually more expensive than expected due to the changes in filing status and the loss of exemptions. It is wise to either review the information on the IRS website or to check with a tax advisor before filing.