The passing of one's partner has many financial implications. In the short term, you're left with funeral expenses, life insurance issues, sorting your loved one's possessions, and dealing with any assets.
As the new calendar year approaches, another challenge arises: Filing taxes. How does the passing of a spouse affect income taxes? Does it change one's filing status? What financial matters need to be accounted for on tax returns?
These are difficult questions, and your best approach is to consult a tax attorney, accountant, or tax preparer or to use a trusted tax preparation software package.
Let's walk through tax issues you need to consider if your spouse died during the past year.
Filing taxes as a widow or widower
Assuming that you do not remarry during the same year of your deceased partner's death, you can still file your income taxes for that year as married filing jointly or married filing separately, as noted by the IRS. This gives you a larger standard tax deduction and higher tax brackets. If you are married filing jointly, the combination of a lower overall household income while still using the higher brackets will likely result in a notable income tax refund -- or at least a smaller income tax bill.
What about life insurance? Life insurance proceeds you receive as a beneficiary due to the death of the insured aren't calculated in gross income, so you don't have to report them on your taxes or pay income taxes on them. However, if any interest was accrued on those benefits, you do have to pay taxes on the interest.
For two years following the year your spouse died, you may be eligible to file as a qualifying widow(er) with a dependent child. You must have at least one dependent child and have not remarried during that time. It allows you to continue receiving the same tax rates and the larger standard deduction of a married couple filing jointly.
How to file taxes for a deceased person
As noted above, most couples will have a filing status this year just the same as they did last year. If you and your spouse filed your taxes together last spring, you'll do so again this spring -- with just a few changes. As always, if you feel unsure about what to do, contact a tax professional for assistance.
All property left to a surviving spouse passes free of estate taxes, as made clear by the IRS in their estate tax documentation. You will not owe estate taxes on anything left to you by your spouse. There are some exceptions if you are not a US citizen, in which case you should consult an estate lawyer to help work through the details.
Inherited retirement accounts
If a surviving spouse inherits a retirement account from a deceased spouse, they can elect to treat it as their own account going forward, according to the IRS. However, the pre-tax or post-tax status of the accounts remain. If the account was funded with pre-tax income originally, such as a traditional 401(k), the surviving spouse will have to pay normal income taxes on the account whenever they choose to withdraw that money in retirement. You can also choose to roll the account over into your own account. Contacting a certified public accountant may be a good choice in these situations.
Also: What do 'pre-tax' and 'post-tax' mean? And why should I care?
Taxes a deceased person might owe
A deceased person might owe taxes to the IRS in several situations:
- The deceased earned income during the year they died. Taxes on that income will be owed by the estate, usually directly by the surviving spouse. This is why survivors are allowed to file taxes for the full year as married filing jointly or married filing separately.
- The deceased owed money to the IRS from previous years of not filing taxes and did not pay that debt in full before passing.
- The deceased did not file taxes correctly in the past, which is discovered by a later audit.
Who pays the taxes a deceased person owes?
In these situations, if there is an outstanding tax bill, the executor of your deceased partner's estate is responsible for ensuring that the money in the estate pays for these tax bills. If the estate has already been split up among heirs, however, and you are identified as being the owner of community property shared with your spouse upon their passing, you may be obligated to pay. As always, a tax lawyer is useful in these situations.
[This article was originally published on The Simple Dollar in January, 2021. It was updated in December, 2021.]