Some Breaks for Widows and Widowers

In chapter 11 of Inheriting Your Spouse's IRA, author Bill Harris highlights some good news for those who have lost a spouse.
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Not everything about the tax code is negative for widows. In addition to the benefits available only to sole spouse beneficiaries outlined in this book, the following are a handful of other available breaks for widows:

William Harris

Bill Harris, RMA

First-Year Exemption

You are allowed to file a joint return for the year in which your spouse died, using the more generous “married” tax rates and the larger standard deduction applied in the past.

Life Insurance Policy Proceeds

These are never income taxable. You do not report the proceeds as part of your taxable income. Life insurance can inflate an estate and, in some cases, trigger estate taxes. (Note: Life insurance, depending upon ownership, can inflate an estate. In some cases, it can trigger estate taxes (state level and/or federal level).

Stepped-Up Asset Basis

You can “step up” the basis of most assets you inherit to the value of that property on the day your spouse died. Gains and losses will be calculated based on this new value, with the IRS forgiving the tax on any appreciation before the death of your spouse.

Jointly owned assets will benefit from a stepped-up valuation on 50% of the asset, except in community-property states, where 100% would be stepped up.

Rental Property

Rental property inherited from a spouse enjoys the same benefit of stepped-up assets described above. This may increase the allowable depreciation deductions and reduce the taxable capital gains if you should ever sell the property.

Capital Gains On The Sale Of Your Home

Couples can exclude $500,000 of capital gains if they meet the IRS’s homeownership and use test. (Individuals can only exclude $250,000.) As a surviving spouse, you can access the $500,000 exclusion if you sell within two years of your spouse’s death.

Minimizing the Widow’s Penalty is not a simple task. The benefits of long-term planning cannot be overstated.

The above article originally appeared as a chapter in Inheriting Your Spouse's IRA and is reprinted with permission from the author Bill Harris, RMA®, CFP®. No parts of this article may be reproduced without correct attribution to the author of this book.

You can find the full book here.