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Friends of mine who are enduring the crucible of the loss of their spouses tell me that one of the hardest things, along with the grieving process, is the uncertainty surrounding finances. All the unknowns and unanswered questions about money matters get tangled up with the overwhelming sadness as the dark cloud blots out everything else.
One important coping strategy involves separating the issues into distinct “pockets” in your mind, to the extent possible. For the sadness and other debilitating emotions that come along with grieving the loss, one of the most helpful things is the sympathetic, listening ears of a trusted friend or advisor. Support groups can be found through your church, synagogue, or other place of worship, or you could even reach out to a group like Modern Widow’s Club, founded by Carolyn Moor, who found herself widowed in her 30s with two young children. Carolyn deeply understands the need for bereaved women to connect with each other.
As for the financial decisions, it’s essential to reach out to professional advisors – CPAs, investment planners, insurance professionals – for help with all the details that need to be attended to. In particular, a tax advisor will evaluate your options and devise a strategy, going forward.
Here are four important tax matters to discuss with a CPA or other tax advisor as you begin the adjustment to life without your partner:
1. When should you begin filing a single return? If your spouse passed away during the year and, as is most likely, you do not remarry before December 31, you are still eligible to file a joint return for the year in which your spouse died. This is beneficial in general, because most deductions and exemptions are greater for taxpayers who are married and filing jointly than for single taxpayers. However, it is important to discuss these differences with your tax advisor as early as possible, so that you can begin planning strategically for when you will begin filing a single return. Especially for bereaved spouses who are still actively working, it is likely that the tax bill will increase. Some planning now can save you money later.
2. What is your value basis for inherited assets? In most cases, you will be able to claim a “stepped-up” basis for assets you receive as a result of the death of a spouse. In other words, your attributed cost basis will be based on the current fair-market value (FMV), rather than the cost at which your spouse acquired the assets. This is especially important for assets like real estate and marketable securities that could have increased greatly in value since your spouse’s original purchase.
3. What is your home sale capital gains exclusion? Tax law currently allows a single individual to exclude from taxation up to $250,000 of capital gains from the sale of a primary residence, but the exclusion is $500,000 for married individuals. If you are contemplating the sale of your home following the death of your spouse, you should consult with your tax advisor to determine whether it is in your best interest to sell the home while you still enjoy the higher marital exclusion. You should also ask about any current or pending changes in the tax law that might affect the timing of your decision.
4. What are your required minimum distribution (RMD) requirements for inherited retirement accounts? If your spouse had IRAs, 401Ks, 403Bs, or other qualified retirement accounts, you likely inherited some or all of these assets. Depending on your age and your spouse’s age at death, you may be required to take out a certain portion of these assets this year and pay taxes on them as ordinary income. The starting age for RMDs has been pushed from 70.5 to 72, due to the SECURE Act. Your tax advisor can tell you when you must begin taking these required distributions and how much you must take out each year.
One common theme in all of the above issues is the importance of getting prompt, professional advice from someone who is familiar with your situation. Don’t put it off; make an appointment as soon as possible, and start getting the answers you need. This is an important way of beginning to exercise some control, which will put you on a positive path for the future.
Kimberly Foss, CFP, CPWA, is president and founder of Empyrion Wealth Management, an RIA with offices in Roseville, CA, and New York City. Her book, Wealthy By Design, is a New York Times bestseller. She has been a commentator for NBC, ABC, Fox News and The Wall Street Journal. You can reach her at [email protected].
Read more articles by Kimberly Foss
Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.
