Dear New Widow(er):
Your friends here at the federal government join me in sending condolences for your loss. We want you to know we are here for you.
To help get things started, we have structured a few special tax deadlines that you really do not want to miss. No wasted time grieving here!
One deadline that may seem a bit silly, given that the estate tax exemption of $11.7 million, is for filing an estate-tax return. I know – only about 1,900 estates owed tax in 2020 and chances are slim that your deceased spouse’s estate was over the limit. So why waste time and money filing an estate-tax return?
The answer is simple: to capture your deceased spouse’s unused exemption. Under certain circumstances you can then add it to your own exemption amount. Because, you know, things could change. You could win the lottery. Your assets could appreciate. Congress could agree on a bill that lowers the exemption. You get the point. Anything, no matter how unlikely, is possible.
Now for the deadline: you have 9 months from your spouse’s date of death to file the estate-tax return. If you miss that deadline, the executor of your spouse’s estate may, possibly, get it extended for up to two years after date of death. Bet you wished you had called your CPA earlier, right?
No pressure, but had you planned to keep your home? Just asking because if you sell within two years of date of death, you can latch onto that couple’s $500,000 tax break on appreciation. After two years, it drops back to the single filer exemption of $250,000.
How about getting rid of other assets? We noticed you are in Texas, so all of your jointly-owned assets just got a step-up in basis to 100% of the fair market value as of your spouse’s date of death. That should bring a lower tax bill when you do sell. Of course, everything you own will get another step-up when you die.
Talking about single – got some sad news for you. The year of death is the last for which you can file as a couple. After that you must file as a single person or, if you have dependent children, you can keep the benefits of a joint filer as a surviving widow(er) for up to two years after your spouse’s date of death. If you end up filing as a single filer, your tax rate might even rise although your income drops. The guys at the IRS call that the widow’s penalty – what a bunch of cutups!
Have you looked at your spouse’s retirement accounts? You might want to think about it before you roll them over to your name. You can divide the accounts and roll over just some – pretty important if you are under 59 ½ and may need to draw some money without incurring a 10% penalty. By the way, make sure to name new beneficiaries on those accounts.
Oh, and let us not forget withholding and estimated taxes. A lot of widow(er)s don’t think about this if the decedent was the one who primarily paid it. There is that pesky underpayment penalty if not enough was paid in before December 31 or immediately after.
You already know about signing new estate planning documents and getting a tax Id on any trust that went irrevocable.
That about covers it. Call anytime– we have a queue waiting just for you!
Your friends at the Gov.
Virginia Hammerle is an attorney with Hammerle Finley Law Firm. She is entering her 40th year in the practice of law and has handled many probate cases. She is Board Certified in Civil Trial Law by the Texas Board of Legal specialization. Contact firstname.lastname@example.org to receive her firm’s newsletter.