Widows and widowers: Frequently, widows and widowers are advised to postpone significant life choices for at least a year following the demise of their spouse. Grief may influence decision-making that is subsequently regretted.
However, certain financial obligations should not be delayed. By securing credit, revising your budget, and consulting with a tax professional, you can protect yourself from unpleasant surprises in the future. After a spouse dies, your income and expenses may change, requiring a new budget.
In 2020, the Federal Reserve Bank of Chicago found that surviving spouses’ income dropped by 37% in the three years after a spouse died. If you were both beneficiaries, you may have to find ways to survive without your partner’s income or accept a lower Social Security benefit. The survivor of a spousal death usually receives the larger of the couple’s Social Security checks.
You have more resources. Having minor children may boost your Social Security eligibility. Retirement funds, investment accounts, and life insurance proceeds may cover living expenses. Finding a sustainable income stream from these assets can be difficult; a fiduciary financial advisor may help. Seek free or low-cost advice from the Foundation for Financial Planning and Advisers Give Back, a nonprofit that matches financially struggling people with certified financial planners.
While certain expenditures may decrease or vanish, others may rise, according to certified financial planner Jennifer Murray of New Providence, New Jersey, who experienced widowhood at the age of 43. Even though you may incur lower expenses, such as groceries and health insurance, your tax rates may increase despite your decreased income. The aforementioned “widow’s penalty” arises from the transition from an advantageous marital filing-jointly status to a less advantageous single status.
Refer to a tax expert
A tax professional can guide you on how to manage inherited retirement accounts, estimate potential changes in tax liabilities, and suggest tax savings in the year of your spouse’s death, according to CFP Marianela Collado of Plantation, Florida.
Before the end of the year, for instance, you could convert retirement funds to Roth accounts or withdraw taxable funds, both of which are tax deductible at the joint filing rate. Additionally, “carry over” investment losses cease to exist upon the demise of the investor, according to Collado. When a spouse utilizes a significant loss to offset investment gains or income in subsequent years, a tax professional may determine whether it is prudent to liquidate winning investments to exhaust the carryover.
The time you have to decide what to do with a house you co-own with your spouse has increased slightly. Typically, an individual is permitted to deduct from their income a maximum of $250,000 in profits from home sales. However, a spouse’s demise provides the survivor with two years from the date of sale to sell a jointly owned home and claim a $500,000 exclusion.
Even if the goal is to reduce home sales taxes, Murray advises against selling. A tax “step up” is given to at least half of a jointly owned home after one spouse dies. This reduces the profit from the home sale, lowering capital gains tax. Community property states apply this improvement to both sides of the dwelling.
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Ensure that you have credit access.
Changing the name on jointly held accounts to your own generally requires submitting the death certificate and notifying the institutions of your spouse’s passing. However, credit cards are typically a different story.
Joint credit cards are uncommon in use today. One of you is typically the primary account holder and the other is an authorized user if you and your spouse share a credit card. Technically, authorized users are prohibited from using the card following the demise of the primary account holder. Upon receiving notification of the decedent’s passing, whether from Social Security or the individual settling the estate, the account is customarily terminated.
CFP According to Birmingham, Alabama’s Patti Black, her family learned this the difficult way. The issuer terminated her parents’ sole credit card following the demise of her mother. Black hurried to assist her 86-year-old father in initiating the process of creating a new card and transferring all the pre-existing automatic bill payments to the new card.
“It was an unnecessary hassle in a time when there were so many other things that needed to be done, and my dad was grieving,” Black says.
Black states that she would have encouraged her father to obtain a card before the passing of her mother if she had known the account would be closed.
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