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When an election looms, we often hear how much the Federal Government does wrong, but sometimes they get it right, and when they do the benefits can be huge. For example, if you suffer the loss of your spouse, the tax code has certain provisions that provide relief in this difficult time. Some of these benefits are set out below.
  • Selling the Family Home. Single homeowners can take $250,000.00 of profit on the sale of a home tax free. For married homeowners $500,000.00 of profit on the sale of a home may be taken tax free. To qualify for this tax break you must live in the home for two of the last five years. So long as you and your spouse meet the ownership and use tests before his or her death, you may use the full $500,000.00 exclusion if you sell within two years of your spouse’s date of death. The stepped-up basis analysis above may be availed of if you do not wish to sell within the two-year period.
  • Life Insurance. The proceeds received from a life insurance policy of a deceased spouse are income tax free and should not be reported as taxable income.
  • Filing Status. If your spouse died this year you may still file a joint return for the year allowing you to avail yourself of the most favorable tax rates and largest standard deductions (if you don’t itemize).
  • Inherited IRA. If you are named as a beneficiary of an IRA, you can claim that IRA as your own. Where it is a traditional IRA you will not be required to take minimum distributions until you reach age 70 ½. If it is a Roth IRA you may never have to take distributions. Where funds are needed you may elect to treat the IRA as an inherited IRA rather than your own and withdraw funds without paying the 10% penalty for early withdrawal.
  • Stepped-up Basis. The taxable basis of most assets inherited from your spouse is stepped up to the property’s value on the day he or she died (certain exceptions apply to retirement accounts). The basis is the amount from which gain or loss is calculated when you sell an asset meaning that tax on any appreciation prior to the death is forgiven. For example, if your spouse had stock that he or she originally paid $10,000.00 for but the value increased to $50,000.00 at the date of his or her death, your basis would be $50,000.00 and you could sell at that price without incurring a tax liability.
  • Rental Property. Where you inherit rental property from your spouse, the step-up in basis will increase the depreciation deductions you may claim on the property. The stepped-up basis will also serve to reduce capital gains when you sell the rental property.

This is merely a sample of certain tax benefits you may take advantage of in a difficult time and you should consult with an attorney for a more comprehensive analysis of the benefits you may enjoy.

Kiplinger, Tax Breaks Soften the Blow of Losing a Spouse, January, 2016, Kevin McCormally

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