If your spouse has passed away, you probably are confronted with many things, so this week I’ll cover a few of the more common tax items for when that happens.

Filing status

If your spouse died during the year, you are considered married for the whole year. If you do not remarry by the end of the year, you can file a joint return for you and your deceased spouse. If you have a dependent child, you may be able to use the filing status “qualifying widow(er) with dependent child” for two years following the year of your spouse’s death, which entitles you to use joint-return tax rates and the highest standard deduction amount, if you do not itemize deductions.

Property valuation

If you inherit property from your spouse, make sure to get a valuation as of the date of death. This becomes most important when inheriting assets with a gain, such as a house or stock. In general, the inheriting spouse gets to “reset” the value of these assets to the date of death, called a step-up in basis. For example, let’s say a stock originally costs $20,000 and it is worth $50,000 at the date of death. One year later, you sell the stock for $60,000. Because you inherited the stock, you pay tax only on the difference between $60,000 and $50,000 (not the original cost).

For assets such as stocks, they usually have a quoted market value, so they can be valued easily. For other assets such as real estate, a qualified appraisal is the best evidence of value, but you can use another method, such as an estimate of value from a Realtor.

The step-up in basis rules are different if you held the property as community property, joint tenants or separate property, so consult with a tax adviser.

Selling your home

Sometimes a surviving spouse will want to move to a new home. In this case, there are two primary issues: First, what is your “basis” in the house, and second, do you qualify for the gain exclusion on the sale of the residence? Regarding the basis, it will be either your cost or the step-up in basis value at the date of your spouse’s death. For the gain exclusion, if you meet the ownership and use tests – generally if you have owned and lived in the home as your main home for at least two years – you are entitled to exclude up to $250,000 of gain on the sale of the house. Also, as a surviving spouse, if you did not remarry before selling the house, you may be able to exclude up to $500,000 of gain on the sale of the house if you sell it within two years from the date of your spouse’s death.

Inherited IRAs

There are many considerations here, such as whether the IRA is traditional or Roth, the age of the surviving spouse and whether the surviving spouse will need the funds soon or wants to keep it in the IRA as long as possible. Speak with an expert to make sure to make the best decision, as there are many ways to handle these IRAs.


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