Losing your spouse can turn your world upside down and cause unbearable grief, so it’s entirely understandable that managing your money is the last thing on your mind. Give yourself some time to grieve before you evaluate what financial decisions will be in your best interest.
When you are ready, you must begin to tackle all the financial task at hand; this includes “avoiding costly tax mistakes.” As a recent widow or widower, you face unique tax considerations; some will need to prompt attention.
Here are a few important tax considerations to help you avoid any mistakes:
IRA’s – a spouse has the benefit of claiming a traditional IRA as their own. Doing so would mean the spouse would not be required to take distributions until they reach 70 ½. However, if your spouse was age 70 ½ or older, you may incur massive tax penalties if you don’t withdraw the required minimum distribution (RMD) on his or her behalf from their account before the end of each year. This rule does not apply to a Roth IRA as distributions are not required. If you are younger than 59 ½ it may make sense to treat the account as an inherited IRA rather than your own as you would be able to withdraw funds without paying a 10% penalty for early withdrawals, and later claim it as your own.
Death Tax Break – the cost basis of an asset is the original value of an asset for tax purposes. The death tax break allows you to be forgiven for any tax appreciation that occurred before the death of your spouse. So if your spouse paid 20,000 for a stock that was now worth 80,000 at their death. Your cost basis would be 80,000. If you sell this stock for more than 80,000, you would owe capital gains. If the stock sold for less, you would have a tax-saving capital loss. A jointly owned stock would get 50% of the appreciated value forgiven.
Life Insurance Benefits – this money should be exempt from income taxes unless the insurer pays you interest on a policy’s death benefits. This interest is most likely taxable at your income tax rate.
Estate tax exemption – this exemption must be filed within nine months to preserve your deceased spouse’s estate tax exemption. This exemption doubles the exemption available upon the second spouse’s death from $5.43 million to $10.86 million. Keep in mind the second spouse’s death can occur decades later increasing in value so even though your estate value does not meet the criteria today; it may at your death. This filing will ensure your beneficiaries receive the benefits of this tax exemptions at your death.
Real Estate Sales – Unmarried widows or widowers can still qualify for the full married couple’s tax exclusion of $500,000 on the sale of their home. This tax benefit will apply as long as the home was the primary place of residence for at least two years of the last five years, and sold within two years of the spouse’s death. However, you may still be able to protect your profit under the death tax break rule.
Joint Tax Filing – widows and widowers can file jointly for the year of the spouse’s death.
As with any life-changing event, it is best to seek the advice your trusted financial advisor and tax consultant.
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