When Jessica Wyles’s husband died suddenly in 2019 at age 57, she found herself facing not only profound grief but also a slew of unfamiliar tax issues.
“I had no idea where to start, even though I handled the family finances,” says Ms. Wyles, a 58-year-old retired engineer who lives in Hawaii.
Ms. Wyles isn’t alone, especially now. About...
When Jessica Wyles’s husband died suddenly in 2019 at age 57, she found herself facing not only profound grief but also a slew of unfamiliar tax issues.
“I had no idea where to start, even though I handled the family finances,” says Ms. Wyles, a 58-year-old retired engineer who lives in Hawaii.
Ms. Wyles isn’t alone, especially now. About 1.5 million Americans become widows and widowers in a normal year, but the pandemic has boosted that significantly. The National Center for Family and Marriage Research at Bowling Green State University estimates that about 380,000 of more than 700,000 people in the U.S. who have died from Covid were married.
Like Ms. Wyles, about two-thirds of surviving spouses are women. While she managed to avoid major mistakes because she knew more than many widows whose husbands managed the couple’s finances, Ms. Wyles says she still found it difficult to navigate the tax requirements—especially the deadlines.
Jan Lewis, a CPA with Haddox Reid in Jackson, Miss., says the process is never simple: “It combines emotional upheaval with the need to make decisions and the complexities of the income tax.”
What’s more, the challenges and pitfalls vary widely. Some survivors who need cash should sell a home within two years of a spouse’s death to get an exemption of $500,000 on the sale proceeds, not $250,000. Others will want to act quickly to convert traditional IRA assets to Roth IRAs in the year their spouse dies, when doing so can lower taxes on the conversion.
Still others should check their withholding or estimated taxes if the spouse who died normally was responsible for making payments to the Internal Revenue Service. This will help avoid underpayment penalties at tax-filing time.
This is a complex area, and learning about it can help with predeath as well as postdeath planning. Here are key issues to consider.
Filing an estate-tax return
The current estate- and gift-tax exemption is $11.7 million per individual, sonot many estates owe tax—only about 1,900 for 2020, according to the Tax Policy Center. Executors don’t need to file a return if the decedent’s estate is below the exemption.
They may want to file one, however, because then the surviving spouse can have the partner’s unused exemption and add it to their own in many cases.
Ms. Lewis says some of her clients, especially younger ones, have opted to file estate-tax returns and claim the unused exemption. They’re making the move in case Congress lowers the exemption amount in the future, assets appreciate, or there’s a surprise windfall—such as winning a lottery.
Estate taxes are normally due nine months after the date of death. But the IRS allows executors to claim the unused exemption for the spouse up to two years after the date of death, in many cases.
Tax-bracket shifts
The year of death is the last for which a couple can file jointly. After that, the survivor files either as a single person or, if there are dependent children, as a surviving widow or widower. Surviving widow(er)s retain the benefits of joint filing for up to two years after the year of the spouse’s death, and then typically file as head of household.
Beware the shift from joint filer to single filer. The survivor’s tax rate may stay the same or even rise while his or her income drops. Some call this “the widow’s penalty.”
For example, take a couple with $230,000 of taxable income and a top tax rate of 24% for 2020. If one spouse died last year and the survivor has $180,000 of taxable income this year, he or she will face a top tax rate of 32% for 2021 even with about 20% less income.
Suggestion: consider accelerating income, such as from asset sales, while joint-filing rates and brackets are still available. If income drops in the year of death, say because of large medical-expense deductions, that could provide more room for acceleration.
The step-up
Under current law, the estate of someone who dies with assets held outside retirement accounts—such as a home, stocks, or a business—typically doesn’t owe tax on their appreciation. When heirs sell these assets, they owe tax only on growth after the original owner’s death. This valuable resetting of the cost basis, which is the starting point for measuring capital gains, is called the “step-up.”
In most states, jointly held assets like a home or investment account receive a 50% step-up after one partner dies. So if a couple bought a house for $200,000 that’s worth $1.1 million when the first spouse dies, the home’s cost basis rises from $200,000 to $650,000—$100,000 for the survivor’s original cost plus $550,000 of step-up for the decedent.
In nine states with community property laws, the step-up on jointly owned assets resets the basis to 100% of fair market value after the first spouse’s death.
Surviving spouses will want to take the step-up into account when selling assets, as a lower gain typically brings a lower tax bill.
The home-sellers’ exemption
Survivors who plan to sell their home should watch the calendar. Married joint filers get to skip tax on up to $500,000 of appreciation when they sell their home, and widows and widowers also get the $500,000 break if they haven’t remarried and sell within two years of the partner’s date of death.
If they sell later, the exemption drops to $250,000, the amount for single filers.
Retirement accounts
Surviving spouses can roll over inherited retirement accounts such as 401(k)s and IRAs into their own names, and financial advisers routinely recommend this move.
But it may not always be smart, says Hal Terr, a CPA with WithumSmith+Brown in Princeton, N.J. For example, if the survivor is under age 59 ½ and will need to draw on an account, then rolling it over could bring a 10% penalty on payouts.
SHARE YOUR THOUGHTS
Have you had to navigate complicated tax issues after the death of a loved one? Share your experience in the conversation below.
“There’s no deadline for a spousal rollover, and there’s no reversing one after it’s made,” he says.
New widows and widowers should carefully consider their options. It’s possible to divide retirement accounts such as IRAs, and to roll over some but not all assets into the survivor’s name. This would leave the remainder in an inherited IRA available for penalty-free payouts to younger spouses.
Either way, heirs of retirement accounts should be sure to name new heirs of their own.
Heirs of these accounts who will face higher taxes as single filers may also want to convert assets to Roth IRAs, which can have tax-free withdrawals—especially if they can convert while still eligible for joint-filing rates and brackets.
Withholding and estimated taxes
In general, filers must send the IRS 90% of their total tax for the year by Dec. 31 or soon after, and often this amount is divided unequally between spouses. If the partner who died paid most of the withholding or estimated taxes, the survivor may need to make changes or else risk underpayment penalties at tax time—especially if the spouse’s death was early in the year.
—Paul Overberg contributed to this article.
Write to Laura Saunders at laura.saunders@wsj.com
October 29, 2021 at 04:30PM
https://www.wsj.com/articles/taxes-after-death-of-a-spouse-irs-11635462166
The Death of a Spouse Is Hard. Taxes Make It Harder. - The Wall Street Journal
https://news.google.com/search?q=hard&hl=en-US&gl=US&ceid=US:en
No comments:
Post a Comment