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Taxes, At First: Part 12a of Financial Considerations When You Lose Your Spouse


When you were young together, you could ride roller coasters and eat spicy food. Back then, your W2 came in the mail; no nagging each other to figure how to log in to ADP or Trinet to pull it.


Taxes alone are even more awful than when you were young. And together. In our series on how to manage finances after the death of a spouse, we’re exploring tips from FINRA, a reliable financial source. Today, Tip 12a: Taxes, At First.


And the Two Shall Become One

When a single person with no spouse dies, the forms that are required and the steps that must be taken are somewhat different than when there is a surviving spouse. You can think of it as the IRS treating you and your spouse as one “entity,” and in the year you lose your spouse, you and your assets and your income continue to be one entity in the IRS’ (and your own!) mind.


Example – Taxes for One

Let’s first look at the tax return requirements for a single person, Jane, who dies on May 5 of 2019. Jane’s income, dividends, stock sale profits, etc. earned in 2019 up until her death would be included on her Form 1040 for 2019. That makes sense because after a person has died, they technically can’t “earn” income. At that point, after death, an “estate” is created with a new tax number.


At that point, an additional form, Form 1041, Income Taxes for Estates and Trusts Return would also need to be filed. Any income attributed to unmarried Jane after her date of death, called “income in respect of a decedent” (IRD) and is reported on that Form 1041 as part of deceased Jane’s “estate” rather than as income on a Form 1040. There are lots of fancy, rich-people reasons for IRD, but the most common reason for us regular folks is the last paycheck from an employer and payouts for used time off/PTO. It is also possible that Jane’s representative (or “executor”) may need to file Form 706, Estate Tax Return, if Jane were very wealthy (i.e., to the tune of $11.4M or more).


Example – Taxes for a Married Couple

Compare Jane’s tax requirement with John’s, who also died on May 5, 2019, but who is married to Susan, who is still living. John’s income, dividends, stock sale profits, etc., earned in 2019 up until his death would be included on a joint Form 1040 for 2019 with Susan where Susan’s income is also added in. Even though John has died, it is unlikely that Susan will need to file Form 1041, Income Taxes for Estates and Trusts Return for him unless John had income or other tax-producing assets separate from Susan. Money that came to John after his death (the “income in respect of a decedent” or IRD discussed above) is added to the joint return that Susan will file, still as Married Filing Jointly, for 2019.


Susan will probably not need to create an “estate” with a separate tax number since she is still alive and was married to John when he died. When Susan dies, assuming she has not remarried, her heirs will then follow the process for single decedents described above. At that point, unmarried Susan’s “income in respect of a decedent” gets added to the “estate” that has been created.


It is also advisable that Susan or her tax preparer may need to file Form 706, Estate Tax Return, even if John and Susan weren’t wealthy in order to preserve “portability”: a special rule that allows a married person to double the amount of the estate that escapes “death taxes,” which is beyond the scope of this little article.


In General

This article assumes that you and your spouse submitted tax returns as “Married Filing Jointly,” which is one tax return with both of your names and incomes on it. After your spouse’s death, as surviving spouse, you’ll complete one income tax return in the year your spouse has died where you get the preferential treatment as filing as a married couple even though it is now just you. This explanation is a very simplified and general one, provided more as description than as a complete procedure. Your tax preparer will do the correct tax returns for your personal Federal and State situation.


Notifying the IRS of the Death

The IRS explains how the Form 1040 will look when you or your tax preparer prepare it in the year your spouse has died: “Across the top of the return - above the area where you enter your address, write "Deceased," your spouse’s name, and the date of death. When you're a surviving spouse filing a joint return and a personal representative [or tax preparer] hasn't been appointed, you should sign the return and write "filing as surviving spouse" in the signature area below your signature. When you're a surviving spouse filing a joint return and a personal representative has been appointed, you and the personal representative should sign the return.”


That Form 1040 can still be filed electronically (E-filed). Keep in mind that if you remarry in the year your spouse has died, you would then file a 1040 as Married Filing Jointly with your new spouse and would need to file another income tax form – the Form 1041 – for your late spouse. It may also be, although it is unlikely, that you or your tax preparer needs to file a Form 1041 for your deceased spouse in addition to your joint 1040.


Conclusion

Taxes after the loss of a loved one can be even more complicated and worrisome than normal, but the procedures and steps are relatively clear, even if not pleasant. We’ll continue to cover FINRA’s tips for widows in the next few articles. Tip 12b is our second and final part on taxes after widowhood. Thank you for joining me.


Kathryn Hauer, a Certified Financial Planner™, adjunct professor, and financial literacy educator has written numerous articles and several books including the “11-Step, DIY, Comprehensive Financial Plan Workbook” and “Financial Advice for Blue Collar America.” She works to help clients and readers understand and act on complex financial information to keep them and their money safe. She functions as a strong advocate and guiding light for her clients as they move through a murky and unfamiliar financial world. Learn more at her website.

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