Revenue Ruling 74-175 helps to address this issue. The Revenue Ruling indicates that if the deceased spouse had any individual NOLs, these can not be transferred to the surviving spouse. However, any joint NOLs (if applicable) can be carried forward.
Only the taxpayer who sustains the loss is entitled to take the deduction. Thus, the loss cannot be transferred to another taxpayer including the surviving spouse.
The NOLs will need to be traced to the business interest that created it. If owned by the decedent, then the loss is only available on the final income tax return. Any amount not completely used will be lost on subsequent income tax returns filed by the surviving spouse.
Proper documentation is crucial to substantiate NOLs. Keep records of tax returns and any NOL calculations.
2. Capital Loss Carryovers
Similar to net operating losses, Revenue Ruling 74-175 helps to address this issue. Only the taxpayer who sustains the loss is entitled to take the deduction. Thus, sales of capital assets will require a tracing to the original owner to determine who is entitled to the capital loss carryover.
If the decedent, then the loss is only available on the final income tax return. If the surviving spouse, then the loss can be carried forward to subsequent income tax returns.
3. Charitable Contribution Carryovers
Charitable contribution carryovers allocated to the decedent will also be lost upon the death of the taxpayer if not used on the final income tax return.
IRC Regulation Section 1.170A-10(d)(4)(i) addresses charitable contribution carryovers upon the death of a spouse. Per the regulations, a joint filer’s original charitable contribution must be recomputed as if two separate income tax returns were filed and not a joint tax return for the year of contribution.
Any amount allocable to the decedent is lost on a subsequent income tax return filed by the surviving spouse.
The main tax carryovers that joint filers may have in the year of death include, net operating losses (NOLs), capital loss
capital loss
Capital loss is the difference between a lower selling price and a higher purchase price or cost price of an eligible Capital asset, which typically represents a financial loss for the seller. This is distinct from losses from selling goods below cost, which is typically considered loss in business income.
carryovers, and charitable contribution carryovers. Review tax carryovers like NOLs and capital losses, as they may not transfer to the surviving spouse.
The surviving spouse could sell his or her own properties at a gain to use the deceased spouse's capital loss carryovers that would otherwise expire, or the surviving spouse could take an IRA distribution and offset that income with the deceased spouse's NOL carryovers.
Taxpayers who do not remarry in the year their spouse dies can file jointly with the deceased spouse. For the two years following the year of death, the surviving spouse may be able to use the Qualifying Widow(er) filing status.
The Bottom Line. The qualifying widow(er) tax filing status allows for tax breaks to a widow(er) for two years following the death of a spouse. You have to remain single and you have to have a dependent living at home to use this status. And you can't use it in the year in which your spouse died.
Unless you qualify for another tax filing status, you'll usually file as Single in the year after your spouse dies. You might not qualify as a Surviving Spouse if your child is a foster child. In that case, you should use Head of Household status.
Surviving spouses get the full $500,000 exclusion if they sell their house within two years of the date of their spouse's death. (They must meet other ownership and use requirements as well.) A surviving spouse who sells their home within two years also may not have to pay any capital gains tax on the sale.
The survivor trap arises in the years after a spouse dies, when the surviving spouse transitions to filing as a single taxpayer and often sees a higher tax bill. Sometimes this occurs because the changed filing status bumps a surviving spouse into a higher tax bracket even if income remains the same.
The tax rates for a Qualifying Surviving Spouse are the same as for couples filing a joint return and are lower than the tax rates for a Head of Household. So if you are eligible to use the Qualifying Surviving Spouse status, you should do so.
The “widow's penalty” occurs when a person's tax filing status goes from married filing jointly to single. This change can cause the surviving spouse to have to pay nearly double the taxes compared to what they were paying.
You can file taxes as a qualified widow(er) for the year your spouse died, as well as two years following their death. So, depending on the timing of when the spouse passed during the year, this time frame could technically be three calendar years.
Individual taxpayers cannot deduct funeral expenses on their tax return. While the IRS allows deductions for medical expenses, funeral costs are not included. Qualified medical expenses must be used to prevent or treat a medical illness or condition.
Surviving spouses with dependent children may be able to file as a Qualifying Surviving Spouse for two years after their spouse's death. This filing status allows them to use joint return tax rates and the highest standard deduction amount if they don't itemize deductions.
In the final year of an estate, unused net capital losses can be passed through to the beneficiaries. As a result, the beneficiaries may carry forward their pro rata share of these losses during their lifetimes.
When death occurs, the investments within these accounts are then sold and the beneficiary is paid the market value. If the beneficiary is a spouse or common law partner, they also have the option to keep the investments and have them transferred to their name.
If one spouse purchases term life insurance coverage, the other spouse is generally the beneficiary unless another is specified. If there is a beneficiary other than the spouse, the spouse cannot override it. However, they are usually entitled to half the death benefit because the law splits community property in half.
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