• David Hilliard

Taxes after the death of a spouse.

Updated: 3 days ago


The death of a spouse is very traumatizing for the surviving spouse and the last thing someone wants to deal with is how their taxes are affected.  Without proper planning and advice, the surviving spouse is likely to receive a cruel reminder of their loss the following tax year.  However, when a plan has been in place and they surround themselves with good advisors this pain can be averted.  I understand this topic may have many variables depending on the taxpayer’s age and retirement status, here the focus is on taxpayers already in retirement.  The two variables to consider are your income and expenses.  Depending on which spouse passes away first, income and expenses likely to reduce, but not as much as you might think. Consider where you would fall into this situation. Usually, we see a drop in social security income and certain expenses like food and clothing, other than that you may be in a similar situation with only one spouse. It is important that your advisors take this into consideration.


Filing Status

In the year of passing, the surviving spouse will be able to file a Married Filing Joint return regardless of how early in the year the decedent passed away. Going forward the surviving spouse will be filing as a single taxpayer. There are two other potential filing statuses available, Head of Household or Qualifying Widower, but they are generally do not apply to the demographic in this scenario. Since the Married Filing Joint income levels are double that of single, you have some planning options in the year of passing help avoid increased taxes in the future.


Standard Deduction

The standard deduction will be lower in the future. In 2020, The standard deduction for a married couple who are both over 65 is $27,400 and $14,050 for a single person over 65. This change will be increasing your taxable income; you may want to consider if itemized deductions are an advantage.


Example

So, let's consider the example of John and Jane Smith. John is 75 and Jane is 72. They each have IRA’s and social security as described below. John had a pension benefit that could be transferred to his spouse upon his death.  After John passed away, Jane was able to take his social security benefit since it was larger than hers.


Planning Opportunities As you can see, once Jane begins filing as a single taxpayer her tax will increase significantly.  Aside from her having an income reduction of $21,000 her federal tax increased by $2,489.  Additionally, because her Adjusted Gross Income as a single filer is over $87,000, she will see her monthly Medicare premiums increase.

This situation is very common, but you can minimize the effects with proper planning. This type of planning does take time; consequently, it is best if you start considering your options now.  Some planning points:

  • Increase your ROTH contributions earlier to reduce RMD’s in retirement.

  • Make ROTH conversions in lower-income years, especially after retirement.

  • Meet with your advisor in the year of passing to take advantage of the larger MFJ tax brackets.

  • Consider qualified charitable donations from your IRA’sRequired Minimum Distribution

If you want to start your plan today, make an appointment with one of our specialists. Work with a team dedicated to being connected to you for generations.

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