Life events are quite often significant money events that will require you to take a hard look at your financial situation and likely make some changes. This rings true specifically for those who find themselves suddenly single again because of death of a spouse.
In the year your spouse dies, you’ll still file your taxes married filing jointly. For example, if your spouse died in December 2019, your return in April 2020 will be filed as married filing jointly. If your spouse were to die in March 2020, you would file a joint return in April 2021 for the 2020 tax year.
Couples filing jointly are entitled to a standard deduction of $24,400; however, if itemized deductions total more, the surviving spouse could itemize the return. Take a close look at medical bills paid out of pocket. If the deceased spouse incurred hospital bills before death, you may exceed the 7.5% of adjusted gross income threshold and be able to deduct a portion of the medical expenses as an itemized deduction. This combined with state and local taxes, mortgage interest and charitable giving may make itemizing more beneficial.
Generally, an estate return is only needed if the deceased has assets in his or her own name and the assets are not swept into a trust upon death. Most often, married couples own assets, like real estate and stock investments, as joint tenancy with rights of survivorship or tenancy-in-common, which means when the owner dies, his or her ownership share of the property is transferred to the spouse.
Even if there is no estate return needed, a surviving spouse will still want to consult a CPA or financial adviser because the surviving spouse will receive a step-up in basis on the property they inherit. This is a readjustment of the value of an asset for tax purposes upon inheritance so that the beneficiary’s capital gains tax is minimized when they sell the asset. For example, if a couple jointly owns a home that was purchased for $100,000 and the current fair market value of the home is $300,000, the surviving spouse will receive a step-up in basis for the deceased person’s portion of the home. This will reduce the surviving spouse’s gain when the house is sold in the future.
Assets like retirement accounts or insurance policies generally pass outside of the estate through beneficiary designations. Most often, the spouse is the beneficiary, or the proceeds are transferred into a trust for the benefit of the spouse. Surviving spouses who inherit IRAs or 401(k)s can generally assume the account as if it were their own. The SECURE Act that requires depleting an inherited retirement account only affects non-spouse beneficiaries.
Those who are suddenly single again, as the result of the death of a spouse, also may need to revisit their financial plan, especially if the loss of a spouse results in the loss of an income. Liquidity needs may need to be adjusted and investment risk tolerances may need to change now that priorities and goals have shifted to a single investor. If you have questions on how your financial and tax planning may need to change after the death of your spouse, the experts at Henssler Financial will be glad to help: