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5 Tax Tips for Recent Widows and Widowers

5 Tax Tips for Recent Widows and Widowers

(Katarzyna Bialasiewicz | Dreamstime.com)

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Monday, 24 February 2020 10:54 AM Current | Bio | Archive

Losing a spouse is never easy. Beyond dealing with the personal grief, it’s also necessary to navigate funeral arrangements, insurance, and shared accounts as well as adjust to new tax rules and requirements.

Here’s what you need to know about managing your taxes after the death of a spouse:

Life Insurance Taxes May Exist, Depending on the Payout Method

Many surviving spouses receive a death benefit from their deceased spouse’s life insurance policy. The amount you receive could be thousands or even hundreds of thousands of dollars, depending on the policy.

If you receive the life insurance payment as a lump sum, you do not need to report it as income to the IRS. That said, if you receive the life insurance payment in installments, you will likely need to pay taxes on the interest, which must be reported when you file your yearly taxes.

In cases where your life insurance benefits were taxable, the insurance company will provide you with Form 1099-INT or Form 1099-OID that you will use to report the policy’s interest on your 1040.

You May Need to Report Potential Debt Cancellations

After your spouse passes, some of his or her debts may be canceled by creditors. If this happens, the creditor will send form 1099-C. The canceled debt is considered income and is taxable. Note that there are a few caveats.

If the debt was shared, and both you and your spouse’s names were on the account, you will need to report the difference as income, as indicated on the 1099-C. There are a few instances where canceled debts aren’t considered income, which include:

  • Student loan debt cancellations
  • Amounts the IRS excludes from income reporting, such as gifts
  • Insolvency cancellations

If you were not named on the account, you will not need to file the 1099-C on your taxes. However, you may need to change your filing status to avoid having to report it. Consider talking to an accountant to help navigate the debt cancellations reporting requirements.

You May Be Able to Keep Your Filing Status This Year

The IRS maintains five filing statuses under which you can submit your taxes:

  • Single
  • Married filing jointly
  • Married filing separately
  • Head of household
  • Qualifying widow(er) with dependent child

If your spouse passed recently and during the tax year for which you’re filing, you may be able to continue filing under one of the two married statuses. For example, if your spouse passed away in June 2019, you may still be able to submit your taxes as “married filing jointly” in April 2020.

You could file your taxes as “married filing separately” or as “single.” However, you’ll enjoy a much higher standard deduction when you submit your taxes as “married filing jointly.”

As a widow or widower, you may only file your taxes under the “married filing jointly” status for the year in which your spouse passed. After that, you may want to consider switching to the “qualifying widow(er) with a dependent” status.

If You Have Children, Take Advantage of the ‘Widow(Er)’ Filing Status

Widows or widowers with one or more children may be able to maintain the “married filing jointly” status for up to two additional years beyond the death of a spouse. The “qualifying widow(er) with dependent child” filing status will allow you to retain the same benefits as “married filing jointly,” so long as you meet the requirements.

You qualify for this special filing status if you meet all of the following criteria:

  • You filed or could have filed jointly for the year of your spouse’s death
  • You are not remarried
  • You have a dependent child or stepchild (foster children do not qualify)
  • Your child lived with you all year, with a few exceptions such as temporary absences, kidnapping, death, or birth
  • You paid over 50% of the cost of keeping up a home, as defined by the IRS

If you fail to meet any of these criteria, you will likely need to file as “single” (unless you have remarried, which allows you to file jointly).

Work With a CPA or Tax Preparation Company

Filing taxes for the first time following the death of a spouse could be complicated. You may want to consider contacting a CPA or working with a tax preparation company, at least for the first year or two following your spouse’s passing.

Not only will a tax professional help reduce your stress during the tax filing process, but he or she may also be able to help you uncover potential tax breaks and other tax benefits that may exist for widows or widowers.

Maxime Rieman is Product Manager at ValuePenguin. Educating and assisting shoppers about financial products has been Rieman's focus, which led her to joining ValuePenguin, a consumer research and advice company based in New York. Previously, she was product marketing director at CoverWallet and launched the personal insurance team at NerdWallet.

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MaximeRieman
Losing a spouse is never easy. Beyond dealing with the personal grief, it’s also necessary to navigate funeral arrangements, insurance, and shared accounts as well as adjust to new tax rules and requirements.
tax, tips, widows, widowers
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2020-54-24
Monday, 24 February 2020 10:54 AM
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