As a Pennsylvania tax accountant, you are the financial expert to whom your clients turn in times of need, including at the death of a spouse. When one of your married clients dies, the surviving spouse will have to deal with changes in both federal and PA taxes that will be difficult to face during a painful time of loss. You can help a surviving spouse navigate through this difficult period by providing strong support for the important financial questions that need to be addressed.
The year of the spouse’s death
In the year of the spouse’s death, the surviving spouse is still considered married for that tax year, whether the deceased died on January 1 or December 31. However, if the deceased spouse has income from only a partial year, take a look at the tax differences if the couple files separately or jointly. For instance, if the primary wage earner dies in February and the surviving spouse has little income, filing separately might put each spouse in a lower tax bracket than filing together when all other deductions are applied, thus saving taxes.
If filing jointly, if the deceased spouse has no personal representative to sign in his or her place, the surviving spouse would sign the return and include “filing as a surviving spouse” in the signature area. If filing a separate return, the tax return must be clearly marked “DECEASED” next to the person’s name, along with the person’s date of death. If the deceased would receive a refund, file the IRS form Statement of Person Claiming Refund Due to a Deceased Taxpayer for the surviving spouse to receive the refund.
Look closely at the deceased’s capital gains, losses, sale of a principal residence, and other financial activity to determine which filing status would benefit the surviving spouse. Since upon a taxpayer’s death, the IRS essentially considers the deceased’s property part of a new tax entity known as his or her “estate,” the heirs (usually the surviving spouse, but a will might stipulate other heirs) would receive the benefits and tax liability of any income generated by investments or property only after the person’s death. So if a taxpayer dies in the middle of the year, half of the income from that person’s investments would be applied to the deceased and half to the heirs.
Look, too, at any IRA required minimum distribution (RMD). If the surviving partner is still under age 70½ but the deceased was older, the survivor would not yet have to take the RMD that the deceased spouse was required to take.
The rules governing decedents and heirs can change every year, so be sure to keep current on these issues. Our PSTAP member network provides strong support to CPAs and accountants as well as educational opportunities and events to keep you informed about important PA and federal tax implications on a variety of issues like this one.
Future considerations
How should the surviving spouse file in future years? Single? Head of household? Qualifying widow(er)? This last option is available for two full tax years after the death of a spouse. The survivor can file as a qualifying widow(er), which offers a higher standard deduction and lower tax rate than filing singly, if the surviving spouse fulfills the following criteria:
- has not remarried
- has at least one dependent child or stepchild who has lived with the taxpayer for over half of that tax year
- AND covers at least half of the costs of maintaining the home.
Many other considerations may arise: What changes should your client make to retirement accounts, the deceased spouse’s IRAs or 401ks, or other finances? How will the death of a spouse affect other situations, such as college tuition for children left behind? What changes should be made to wills and powers of attorney documents? As a trusted tax expert, you will be your client’s resource and support to navigate these decisions. The answers will depend upon the family’s unique situation.
Make time to discuss these issues with the surviving spouse. If you don’t already offer advisory service packages providing different levels of access, you may wish to consider developing such a plan. This will help your clients receive from you the help they need while at the same time helping you prevent scope creep, manage your time, and grow your business.