Clients who just lost their spouse probably aren’t thinking about taxes. But it's something that should be on the minds of their advisors.

“Advisory support in the months that follow can be critical to the client making wise decisions,” said Mark Weiskind, president of Fairway Wealth Management in Independence, Ohio.

The death of a spouse can quickly change a survivor’s ability to itemize tax deductions (especially medical and charitable), capital gains on the sale of the home, loss carryovers and retirement account required minimum distributions, Weiskind said.

Single filing status will eventually result in higher taxes “and the ‘survivor’s penalty’ may be worse if individual tax provisions [of the Tax Cuts and Jobs Act, or TCJA] sunset after 2025,” said Todd Neal, client management partner with Callan Family Office in West Palm Beach, Fla.

A surviving spouse who doesn’t remarry and has a qualified dependent may file their 1040 using the "qualifying widow" status for two years after their spouse dies, which provides the same tax bracket advantages as married couples filing jointly, said Pamela Dennett, a partner in private client services at Eisner Advisory Group in Dallas.

From Jan. 1 of the year of the death until the date of death, both spouses’ income is included on the joint Form 1040. From the date of death through the end of the year, only the surviving spouse’s income is reported on the joint 1040; income from the date of death through the end of the year for the deceased is typically reported on an IRS Form 1041.

Changed income can allow the deduction of medical expenses, an important consideration if the deceased was sick. “It can be useful for a surviving spouse to take advantage of certain tax deductions related to funeral expenses and dependent care on their current year’s tax filing,” added Andrew J. Mescon, CEO of Ballast Rock Private Wealth in San Diego.

Loss of taxable income, such as a deceased’s pension and some Social Security, may also ease the bite of a higher tax filing status, said Timothy Smith, founder and CEO of Aurora Private Wealth in Rockaway, N.J. “The primary concerns of most couples about death of the partner, from a planning perspective, are about having adequate life insurance and having proper wills and trusts ready,” he said. 

“Clients, even wealthy ones, are typically more concerned about how a spouse’s death will impact their cash flow and access to assets than the implications of their tax situation,” said Isaac Bradley, director of financial planning at Homrich Berg in Atlanta. 

Affluent survivor clients usually focus on estate tax. Large estates need to consider if the “highly complicated” U.S. Estate Tax Return (Form 706) is required for the deceased spouse. “A 706 is typically required if the gross estate of the decedent is greater than $13.61 million,” Dennett said. “It still may make sense to file a 706 if an estate is under this threshold so the surviving spouse can elect to transfer their deceased spouse’s unused exclusion.”  (The $13.61 threshold will likely be halved if the TCJA provision expires at the end of 2025.)

Another concern is the exclusion of capital gains if surviving spouses sell the primary residence. “A survivor must sell their principal residence within two years of the first spouse’s death to receive the full $500,000 gain exclusion that’s normally available for joint filers,” Bradley said. The exclusion for other filing statuses is $250,000.

Planning is best, when possible. “If one spouse is likely to pass away sooner than the other, there’s an opportunity to transfer highly appreciated assets into an account titled in the name of the spouse who [dies] first,” Weiskind said. “That would allow for a step up in basis to occur upon death, potentially [reducing] capital gain taxes.”

Converting traditional IRAs to Roth IRAs before a spouse’s death, for instance, can avoid later taxes for the beneficiary surviving spouse, Neal said, which is especially effective if the survivor expects to be in a higher tax bracket in the future.

“If the situation warrants, rerun financial independence projections with a higher tax bracket and let the client know if the higher taxes present a hindrance,” Smith said.