Ask an Advisor: What are the tax implications for a recently widowed individual in their late seventies, and how can they be optimized?

Ask an Advisor: What are the tax implications for a recently widowed individual in their late seventies, and how can they be optimized?

Losing a spouse is emotionally challenging, and navigating the accompanying tax implications can add another layer of complexity, especially for individuals in their late seventies. For a recently widowed person in this age group, understanding the tax implications is crucial for managing their finances effectively during this transition period. From potential changes in filing status to managing retirement account distributions, there are several key considerations that can impact their tax situation. In this article, we will explore the tax implications facing a recently widowed individual in their late seventies and discuss strategies to optimize their tax situation during this challenging time.

What are the tax implications for a recently widowed individual in their late seventies?

Filing status:  In the year of the spouse’s death, the surviving spouse can still file as Married Filing Jointly.  However, in subsequent years, the surviving spouse will typically file as either Single or Head of Household, depending on their circumstances.  As a single filer, the surviving spouse’s tax bracket may change, potentially leading to a higher tax rate on their income.

Social Security:  Widows or widowers may be eligible for Social Security survivor benefits based on their deceased spouse’s earnings. These benefits may be taxable depending on the individual’s total income.

Estate taxes:  Depending on the size of the deceased spouse’s estate and applicable state and federal laws, estate taxes may apply. However, many estates are not subject to federal estate taxes due to high exemption thresholds.

Taxable assets with unrealized gains:  When a widow inherits an asset, such as a house or brokerage account, the cost basis of that asset is adjusted to its value at the time of the original owner’s death. This adjustment is referred to as a “step-up” in the cost basis.  If the widow decides to sell the inherited asset, they would only owe capital gains tax on the appreciation of the asset from the time they inherited it, not from the original purchase price. 

Inherited IRA for Spouses:  As the surviving spouse, the widow has the option to treat the inherited IRA as their own by rolling it over into their own IRA. This allows them to defer distributions until they reach age 72 (the age for required minimum distributions (RMDs) under current tax law).  

Alternatively, the widow can choose to keep the IRA as an inherited IRA. This option allows them to take distributions based on their life expectancy rather than the original owner’s life expectancy. Since the widow is younger than the deceased spouse, this option may result in smaller RMDs and potentially lower taxes.  If the widow decides to keep the IRA as an inherited IRA, they must begin taking RMDs by December 31 of the year following the spouse’s death. The RMD amount is calculated based on the widow’s life expectancy using IRS life expectancy tables.

Distributions from a traditional inherited IRA are generally subject to income tax at the widow’s ordinary income tax rate. If the IRA contains pre-tax contributions and earnings, the widow will owe income tax on the distributions. However, if the IRA is a Roth IRA, distributions may be tax-free if certain conditions are met.

How can tax implications be optimized?

Consult a financial planner:  A financial planner can thoroughly and holistically review the widow’s financial situation, including their assets, income sources, and potential tax liabilities. This review helps identify areas, like the topics discussed above, where tax optimization strategies can be implemented.

Consult a qualified tax professional:  A qualified tax advisor will ensure you are taking advantage of tax deductions such as medical expenses, charitable deductions, and qualified charitable distributions.  They can also advise on adjusting tax withholding from pensions, Social Security benefits, and other income sources to ensure that enough taxes are being withheld to cover any potential tax liabilities.

Consult an estate planning attorney. An estate attorney can help with tasks such as creating or updating estate planning documents, such as wills and trusts, to minimize estate taxes and ensure assets are distributed according to the widow’s wishes.  

Overall, the tax implications for a recently widowed individual in their late seventies are multifaceted and require careful consideration. From changes in filing status to managing inherited assets and retirement accounts, there are various strategies available to optimize their tax situation during this challenging time. Consulting with a financial planner, tax professional, and estate planning attorney can provide invaluable guidance and expertise to ensure that the widow’s finances are managed efficiently and in accordance with their goals and objectives.

By taking proactive steps and implementing tailored tax optimization strategies, widows can navigate the complexities of their tax situation with confidence and peace of mind as they move forward in this new chapter of their lives.

About the Author

Do you have questions about your financial future? Find a financial advisor who can help you enjoy life with less money stress by visiting Wealthtender’s financial advisor directory.

Whether you’re looking for a specialist advisor who can meet with you online or you prefer to find a local financial planner, you deserve to work with a professional who understands your unique circumstances.

Have a question to ask a financial advisor? Submit your question and it may be answered by a Wealthtender community financial advisor in an upcoming article.

This article originally appeared on Wealthtender. To make Wealthtender free for our readers, we earn money from advertisers, including financial professionals and firms that pay to be featured. This creates a natural conflict of interest when we favor their promotion over others. Wealthtender is not a client of these financial services providers.