Changes in Income. One of the biggest changes you may face is a reduction or elimination of income. While a loss of income may mean a reduction in taxes, tapping into other and possibly new resources to offset this loss of income may not be the reduction you were expecting.
A potential loss of income is why we encourage our clients to properly prepare for life-changing events such as the loss of a spouse with the proper tools—for instance, life insurance. Three common types of income to consider are employment income, pension income, and Social Security income. These are most common, but there are many other kinds of income to consider—all of which can have an impact on your taxes.
Life Insurance Taxes. As previously mentioned, a death benefit from a life insurance policy can provide significant financial relief after losing a spouse. On a positive note, life insurance proceeds are generally not taxable to the beneficiary if established properly.
Step-up in Basis. When a spouse passes away, the surviving spouse may benefit from a step-up in basis for tax purposes. This adjustment applies to inherited assets, such as real estate or stocks, and resets your cost basis to the fair market value at the date of the deceased spouse’s death. This can significantly reduce capital gains taxes if the surviving spouse later sells the asset, as the taxable gain is calculated based on the stepped-up value rather than the original purchase price.
Tax Filing Status Change. Perhaps the most obvious change in taxes after losing a spouse is the transition from filing jointly to filing as a single taxpayer. In the year your spouse passes away, you can still file a joint return, which often provides more favorable tax rates and a higher standard deduction. However, in subsequent years, you will typically file as a single taxpayer unless you qualify as a surviving spouse or head of household.
Taxes are just one aspect of the financial changes that come with losing a spouse. When your focus should be on grieving and healing with your family and friends, financial decisions tend to demand your attention. If you’re looking for relief from considering all of these changes and decisions, I highly recommend working with an experienced financial advisor. Fragasso Financial Advisors is always here to help.
Take a deeper dive for more insights on navigating life after loss at fragassoadvisors.com/survivors_guide/.
Investment advice offered by investment advisor representatives through Fragasso Financial Advisors, a registered investment advisor.