Losing a spouse often results in a loss of income or other financial difficulties for the widow. The federal government offers a number of tax deductions to ease the financial transition for widows during the first three years following his spouse's death. These deductions come primarily in the form of an alternate filing status. However, other tax benefits are also available. Understanding your tax deduction options can save you thousands of dollars.
Your filing status determines your tax rates and the size of your standard deduction. Tax rates are lower for joint returns while the standard deduction is higher. You may file as married filing jointly for the tax year during which your spouse died. For the next two years, you may be able to file as qualifying widower with dependent child, which will grant you the same tax rates and standard deduction as a joint return. You qualify for this status if you have not remarried, you have a child or stepchild you can claim an exemption for, the child lived with you all year and you pay more than half the expense of maintaining your household.
Unlimited Marital Deduction
Normally property passed on from the deceased is subject to the federal estate tax. However, there is an exemption if the surviving spouse is a U.S. citizen. In this case, all money and assets inherited by the widow are exempt from taxes.
Upon the death of your spouse, any property you held in common, such as your house, will be stepped-up to the current fair market value. This reduces the amount of capital gains tax you will be responsible for should you sell the property in the future. For example, if you bought a house for $100,000 and sold it 10 years later for $200,000, you would normally be responsible for taxes on the $100,000 appreciation. However, if your home was worth $150,000 in year five and your spouse died that year, the base value would be stepped up to $150,000. In this case, if you sold the house later for $200,000, you would be responsible for taxes on only the $50,000 of appreciation.
No matter what point during the year your spouse dies, you remain eligible for any deductions you could have claimed had your spouse lived for the entire year. These deductions are not specific to widowed people, but you do remain eligible for them. In the following years, you should continue to check your eligibility for these deductions. Additionally, if your income has decreased, you may want to check whether you have become eligible for tax credits, such as the earned income tax credit, which you may not have qualified for before.