#11 - Tax Planning After A Loss
Reluctant Executor News
Everything you learned about taxes changes after a death. The first impact for many people is their change in tax status from married to single. On the surface this will increase your taxes, but with planning you may be able to utilize your married filing status to save on taxes in the future.
Other tax benefits apply after a loss, such as step-up basis. This resets the cost basis for assets to the date of death. In most cases this will reduce your capital gains taxes, possibly eliminating them completely.
In all cases, make sure you work with a Certified Financial Planner or a Certified Public Accountant to fully understand your options regarding taxes and investment.
LinkedIn post from April 12, 2023
You probably only think about your tax filing status around tax time. For most of us it's simply checking the Single or Married Filing Jointly box. For those whose spouses died in the past year, taxes could change significantly if you aren't prepared.
The IRS has a filing status called Qualifying Widow(er). I always assumed this was a temporary status for widow(er)s that gave them a couple of years to adjust and plan for different income. I never paid attention to the "qualifying" part of it.
If you do not remarry before the end of the year in which your spouse dies, you can claim Married Filing Jointly status. However, the next year you must file as Single.
This increases the chances you'll have to pay much more in federal tax because the tax brackets are halved.
For example in 2023, Married Filing Jointly pay 10% up to $22,000, but Single filers pay 10% only up to $11,000 before they reach the 12% bracket.
Qualifying Widow(er) status allows you to use the same tax brackets as Married Filing Jointly for up to 2 years following the year of death, but you must qualify.
The IRS lists the exact details to qualify, but essentially you cannot remarry and you have to have a dependent child that lives with you. The eliminates most older people since their kids are grown up and out of the house.
This change in tax status becomes extremely important when planning tax withholding for things like social security or RMD distribution.
Has anyone been caught off guard with a larger than expected tax bill due to a change in filing status?
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LinkedIn post from April 25, 2023
Do you like paying taxes?
You may not be able to avoid paying taxes when you're alive, but your heirs can.
When you sell property, like stocks or real estate, you pay taxes on the gains. The original purchase price is called the basis.
If you own property when you die, the IRS allows the heirs to change the basis. The new basis becomes the fair market value of the property at the time it was inherited. For stocks, the basis becomes the stock price on the day you die.
This is known as step-up basis.
In addition to lowering your tax bill, it also helps when families hold stock for a long period and don't have records of the original basis.
My dad had a modest brokerage account. He owned stock in one company for over 40 years. This stock has gone through spits, reverse splits, and countless dividends that were reinvested.
He also changed brokerages a couple of times. The original cost basis information did not transfer with the stocks. So for any stock that was purchased in an old brokerage, we have no clue what price he paid for them. Using the step-up basis, we can look at what the price of each stock was on the day he died.
This makes financial and tax planning is much easier.
It also can nearly eliminate taxes owed on this property.
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After Loss Support
Some of the tax advantages need to be processed soon after a death. We know that tax is the last thing you want to think about after a loss, so when you work with Reluctant Executor, we won't let this slip through the cracks.
If you or someone you know needs this type of support, contact me at Bill@ReluctantExecutor.com