The Best Things to Know About Taxes for the Newly Widowed

If you’re recently widowed and have a relationship with a CPA or other tax professional, great! Please consult with him or her. If not, there are some basic things you should know.

With the loss of a spouse comes pain, grief and uncertainty. Unfortunately, the one thing that is certain are taxes. Returns must be filed every year, including the year in which your spouse died. I understand this is the last thing you want to tackle. Hopefully, this article will make it easier for you to do so. Let’s begin by discussing filing status.

It’s important to pick the correct filing status because your selection affects the amount of taxes you pay, the standard deductions you can take, and certain tax breaks you can claim.

The IRS provides for the following filing statuses: single, married filing jointly, married filing separately, head of household and qualifying widow(er). The tax brackets are the same for joint filers and qualifying widows. Should you qualify for more than one status in a tax year, you can file using the one that saves you the most in taxes.

Filing a Married Joint Return

Most couples file joint returns, so let’s begin with this filing status. If your spouse died this year, you should file your taxes just as if your spouse were still alive. If he had income, enter it as you would in any other year.

In the year of a spouse’s death, the surviving spouse usually is considered married for the entire year, for tax purposes. Therefore, the surviving spouse can file a joint return for that year. This rule also applies if both spouses die during the same tax year.

Filing a Married Filing Separately Return

If you and your spouse have been using this filing status, it is most likely because someone determined that you paid less taxes by doing so. This still may be the best choice for you depending how much income your spouse earned before he died (assuming he had earned income the year of his death). But if he died early in the year, filing a Married Joint Return may now be to your advantage. The only way to know for sure is for your tax representative to run it both ways and compare outcomes (yes, they can and should do this for you).

Under normal circumstances these are the only two ways you are going to file the year your spouse died.

If you Remarried the Year Your Spouse Died

In this situation, you would file differently than just explained. If you remarry in the same year of your spouse’s death, you’d file your return with your new spouse under the joint or separate status. Consequently, you would file a return for your deceased spouse using the Married Filing Separately status. Again, this assumes the deceased spouse had earned income that needs to be reported to the IRS.

Filing the Year Following the Year of Death

Fortunately, the IRS offers a way to transition from a married filing status to a less-advantageous single filing status. It’s called the qualifying widow(er) tax filing status.

The qualifying widow status, which provides many of the same tax benefits as the married filing jointly status, is not available to everyone. To be eligible to file using the widow(er) status in 2019, a surviving spouse must meet the following criteria (as detailed in the IRS Publication 17, Your Federal Income Tax):

Spouse’s death occurred in 2018 or 2017 and no remarriage has occurred.

Must have a dependent child, stepchild, or adopted child (but not a foster child).

You paid for more than half the cost of keeping up a home. This must be your child’s main home for the entire year, except for temporary absences.

It is also important to be aware of the income thresholds that require a tax filing if the surviving spouse chooses to use the qualifying widow(er) status. For the two years after a death has occurred, an individual filing under widow(er) status must have income of:

$24,400 if younger than 65

$25,700 if older than 65

If income falls below these levels a tax return is not required in most cases but may be beneficial if certain credits are available.

To recap, if you qualify for this unique filing status, you can use it for two years following the year your spouse died. This is a good deal.

If you don’t qualify for this filing status, you’ll have to use one of the two remaining filing statuses following the year your spouse died. Neither are as tax-friendly as those we’ve already discussed. Yes, this is a bummer.

Filing a Single or Head-of-Household Return

You will be required to file using either Single status or Head-of-Household status:

If you do not qualify for using the qualifying widow filing status the year after your spouse died, or

After the two-year period using the qualifying widow filing status ends,

And you remain unmarried.

The Head-of-Household filing status is for those who are single, unmarried and have qualified dependents. To qualify for this status, you paid for more than half the cost of keeping up a home. Otherwise, you will use the Single filing status.

The Head-of-Household filing status is the better alternative to filing Single. This is because the tax rates are lower and the standard deduction higher than if you file single or married filing separately. Again, you must qualify.

Form 1040 or Form 1041

Let’s look at the IRS forms you are most likely to encounter, because this can be confusing. You use IRS Form 1040 to file your Federal income tax return (joint or separate status). This form should capture all taxable income (earned income like salary and wages, tips and other employee compensation, and unearned income like dividends, interest and capital gains) and deductions up to the date of your spouse’s death. IRS Form 1041 is used to capture all taxable income after the date of death. For example, if your spouse owned a bank account, interest income earned through the date of death would be included on Form 1040. However, interest earned after death would be reported on Form 1041. (Note: these forms are undergoing changes in time for the 2019 tax season.)

It Can Get Complicated in a Hurry

Final words of wisdom. It can get complicated in a hurry, and when it does, please get good advice from a tax professional or financial advisor.

Filing a joint return in the year of a spouse’s death can be an advantage sometimes and other times not. For example, if the deceased spouse has capital losses and the surviving spouse has capital gains, these amounts may be combined on a joint return. This is important because if an individual passes away with an unused capital loss carryover, it expires unused. Filing a joint return is to your advantage in this case.

There is also a potential advantage when a surviving spouse sells a principal residence within two years of the spouse’s death. In this case, the larger $500,000 gain exclusion (which is normally only available for joint filers) is still available, as opposed to the smaller $250,000 exclusion for unmarried taxpayers.

A potential disadvantage of filing a joint return might be when a higher adjusted gross income results from combining incomes, thereby disallowing certain itemized deductions, due to certain limitations. Easy, right?

Summary

There is nothing worse than losing a beloved spouse, except filing taxes after losing a beloved spouse. Nobody likes taxes, but they have to be taken care of. I recommend hiring a CPA or professional tax preparer if you don’t already have one; if you lost your spouse this year, it would be a worthwhile spend. For help in finding a tax professional, the IRS offers a free tool to help you.

If you’re going to attack this on your own, here are a few tools that might help. If you’re not sure whether you qualify, or will qualify, for the qualifying widow status, or any other status, the IRS offers a free tool to help you figure it out.

There are a number of free options you should know about. You can use the Credit Karma Tax online preparation and filing service to help you choose a filing status, and then file your federal and single-state tax returns for free.

The Volunteer Income Tax Assistance program, known as VITA, provides access to IRS-certified volunteers who can help prepare taxes for free. Free tax preparation is typically available to those with incomes of $56,000 or less. Google to find one in your area or call 800-906-9887 to locate the nearest VITA site to you.

Finally, the Tax Counseling for the Elderly (TCE) program offers free tax help for all taxpayers, particularly those who are 60 years of age and older. The IRS-certified volunteers who provide tax counseling are often retired individuals associated with non-profit organizations that receive grants from the IRS. A majority of the TCE sites are operated by the AARP Foundation’s Tax Aide program. To locate the nearest AARP TCE site call 888-227-7669.