Surviving spouse tax guide: Filing, accounts & exemptions

Given everything there is to process, thinking about taxes after the death of a spouse may not be a high priority for you. But this life event dramatically can change your tax status and overall financial situation.

With what's been called the "widow's penalty," surviving spouses can bear a greater tax burden even if their income has decreased.

If you know what to expect, you can create a financial plan that leverages tax efficiency and helps preserve your assets. Here's what you need to know.

A surviving spouse likely will have to shift their tax filing status, may have to pay estate taxes and may experience changes in how Social Security benefits are taxed. Here's a detailed look at each of these factors:

When a spouse dies, the surviving spouse will become a single filer, which could be jarring after being used to married filing jointly. That's because tax brackets favor couples. For example, a $90,000 income for someone who is married, filing jointly is taxed at 12%, based on 2024 tax rates. That same income for a single filer is taxed at 22%. Single filers also have a lower standard deduction—$14,600 for single filers under the age of 65 compared to $29,200 for married joint filers of similar age.

You can file jointly in the year of your spouse's death (unless you remarry). However, after the year of death, you'll file as a single taxpayer, unless you are a qualifying widow(er) with a dependent child.

An estate valued at more than the federal exemption, $13.61 million in 2024, could be taxed between 18% and 40%. If your state has an estate tax, you'll also need to factor that into your financial plan. These taxes are typically due within nine months of a spouse's passing.

You can make the election to use your deceased spouse's unused exemption when you file their estate tax return. Even if you don't have to file an estate tax return, you may be able to separately elect to use the unused exemption within 5 years.

If you're planning to sell your home after your spouse's passing, their separate home seller's exemption that avoids taxes on capital gains will apply for two years after the death, provided that you have not remarried in the interim. After that time period, the exemption is lowered from $500,000 to $250,000 as a single person.

After your spouse passes away, you're entitled to survivor benefits through Social Security if you're at least 60 years old and had been married to the deceased for at least nine months.

There are a few exceptions to these qualifications, including:

• If your spouse's death was accidental or occurred during U.S. military duty, there's no length-of-marriage requirement.
• If you're caring for children from the marriage who are younger than 16 or are disabled, there's no age requirement.
• If you're younger than full retirement age and still working, you could be affected by the Social Security earning limit. In 2024, that limit is $22,320.

In many cases, Social Security benefits are taxable. Whether you're taxed on Social Security benefits will depend on your combined income as defined by the IRS. The IRS formula for calculating combined income looks like this:

1. Begin with your adjusted gross income (AGI). The AGI is your gross income minus any adjustments. Gross income includes your wages, dividends, interest, capital gains, retirement distributions, business income and possibly other taxable income.

2. Then add nontaxable interest. This interest is tax exempt, but it still gets included in the calculation.

3. Then add half of your Social Security benefits. To get this figure, refer to your Social Security Benefit Statement (Form SSA-1099), which you should receive each January. The statement shows the total amount of benefits you received in the previous year.

Learn more about Social Security taxes

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A deceased spouse may leave financial assets to be transferred to the surviving spouse. This can help ensure your financial needs are met, but you'll want to consider your options for receiving any funds and how they might impact your taxes.

If you inherit a traditional IRA from your spouse, you generally have a few options:

• Take a lump-sum distribution. Use the money to cover living expenses or placing it in a savings or investment account. Keep in mind that distributions from a traditional IRA are taxable and could potentially push you into a higher tax bracket.

• Roll over the IRA into your IRA account. Then take your required minimum distributions (RMDs) when you reach the required age—currently 73 but on course to increase to 75 in 2033.

• Establish it as an inherited traditional IRA. Your RMDs start either the year the deceased would have turned RMD age or the year following their death, whichever is later.

Note that if the original IRA owner died before taking their RMDs, the 10-year rule is an option. This rule requires that all assets in the inherited IRA must be distributed by the end of the 10th year of the original IRA owner's death.

Effective in 2024 as part of the SECURE Act 2.0, a surviving spouse may elect to be treated as the deceased spouse for the RMD rules and use their spouse's age to delay withdrawals. This method might benefit you if your spouse was younger than you when they passed.

If inheriting a Roth IRA, you'll generally have options similar to inheriting a traditional IRA:

• Receive a lump-sum distribution. Distributions from a Roth IRA are not subject to income tax if the account has been open for at least five years.

• Roll it over to your own Roth IRA. You're not required to take distributions from your Roth IRA during your lifetime, but you may need to meet withdrawal qualifications to take out money tax-free.

• Leave the account as an inherited IRA. Leaving the Roth IRA as an inherited account means complying with the IRS's RMD rules, some of which changed in 2024 as a result of the SECURE Act 2.0. In general, you can:
  
  • Delay taking required distributions until the date the deceased would have turned 73. If the original owner was already at their RMD age, you will need to take distributions by 12/31 the year after their death.
  • Take distributions based on your life expectancy.
  • Withdraw funds from the inherited Roth IRA by the end of the 10th year after the death of the account owner.

As with inherited traditional IRAs, non-spouse beneficiaries may have fewer options. Depending on the type of beneficiary, a non-spouse can take distributions based on their life expectancy or the deceased IRA owner's remaining life expectancy, whichever is later, or they can ensure that all funds are withdrawn by the end of the 10th year following the IRA owner's death.

Get more detail on inherited IRAs

A surviving spouse may inherit other retirement accounts, like a 401(k) or pension. The RMD rules and options for taking distributions or rolling over funds should be outlined in the plan documents. Contact the employer or plan administrator to understand the amount and type of benefits available to you.

As you think through your options, keep these considerations in mind:

• Distributions from a 401(k) or pension plan are taxable unless they are from a Roth account. Taking a lump-sum distribution could increase your tax burden.

• Non-spouse beneficiaries typically have fewer distribution options. While a surviving spouse may be able to roll over a deceased spouse's 401(k) to their own 401(k), a non-spouse beneficiary may not have this option.

If your spouse assigned you as a beneficiary of their banking and savings accounts, the funds may be released to you once the financial institution is notified of your spouse's death—known as payable on death or transfer on death.

Without a will or a payable or transfer on death provision, your state appoints an executor, which may be a family member, to administer the needs of the estate. This includes paying debt and distributing remaining assets per local inheritance laws.

Cash, including banking and savings accounts, that you receive as an inheritance is not taxable income.

Certain annuity contracts allow you to pass on benefits to your loved ones if you die before your guaranteed payment period ends. If you inherit an annuity death benefit, you can take the money as a lump-sum payment or a stream of payments.

• The full amount of your lump-sum payment could be taxable if it's from a qualified annuity. Earnings from a nonqualified annuity are taxed as income though the principal is not.

• With a payment stream, you'll receive a series of annuity payments over time. The entire payout from a qualified annuity is still taxable while only interest from nonqualified annuities is taxable. Taking a series of payments can spread your tax burden over time.