Tax Carryovers When a Spouse Dies | LBMC (2024)

FAQs

Is a tax loss carry forward after death? ›

An individual's capital loss carryover expires at their death. However, it can be put to use in the final tax return filed for that person.

Capital Loss Carryovers

If the decedent, then the loss is only available on the final income tax return. If the surviving spouse, then the loss can be carried forward to subsequent income tax returns.

Qualifying widow or widower

Surviving spouses with dependent children may be able to file as a Qualifying Surviving Spouse for two years after their spouse's death. This filing status allows them to use joint return tax rates and the highest standard deduction amount if they don't itemize deductions.

For a simple example of the NOL carryforward rules post-TCJA, suppose a company lost $5 million in 2022 and earned $6 million in 2023. Its carryforward limit for 2023 would be 80% of $6 million, or $4.8 million.

If the net amount of all your gains and losses is a loss, you can report the loss on your return. You can report current year net losses up to $3,000 — or $1,500 if married filing separately. Carry over net losses of more than $3,000 to next year's return. You can carry over capital losses indefinitely.

A tax loss carryforward is a special tax rule that allows capital losses to be carried over from one year to another. In other words, an investor can take capital losses realized in the current tax year to offset gains or profits in a future tax year.

The “widow's penalty” occurs when a person's tax filing status goes from married filing jointly to single. This change can cause the surviving spouse to have to pay nearly double the taxes compared to what they were paying.

Unless you qualify for another tax filing status, you'll usually file as Single in the year after your spouse dies. You might not qualify as a Surviving Spouse if your child is a foster child. In that case, you should use Head of Household status.

Special Rule for Community Property

Specifically, when married couples own community property and one spouse dies, you don't just get a step-up for the part owned by the deceased spouse. You get a Step-Up in Basis for the entire community property. (See IRS Publication 555 in March of 2020.)

In simple terms, the widow's penalty refers to a situation where a surviving spouse may experience a reduction in their overall income or financial benefits, but an increase in taxes, after their partner passes away.

What is the most advantageous filing status for a widow? ›

The tax rates for a Qualifying Surviving Spouse are the same as for couples filing a joint return and are lower than the tax rates for a Head of Household. So if you are eligible to use the Qualifying Surviving Spouse status, you should do so.

For the two years following the year of death, the surviving spouse may be able to use the Qualifying Widow(er) filing status. To qualify, the taxpayer must: Be entitled to file a joint return for the year the spouse died, regardless of whether the taxpayer actually filed a joint return that year.

The $3,000 loss limit is the amount that can be offset against ordinary income. Above $3,000 is where things can get complicated.

No, you cannot carry over net loss from your business to future tax years using Schedule C. Instead, if your business losses exceed Schedule C limits, you need to use Form 461 and include it on Schedule 1 of Form 1040.

A Net Operating Loss (NOL) Carryforward allows businesses suffering losses in one year to deduct them from future years' profits. Businesses thus are taxed on average profitability, making the tax code more neutral.

Upon termination of the trust or decedent's estate, the beneficiary succeeding to the property is allowed to deduct any unused capital loss carryover under section 1212. A short-term capital loss carryover, reported as code C, is reported on Schedule D (Form 1040), line 5.

If you make as 663(b) election and the 2023 return is marked as final, then the losses will pass through to the beneficiaries for use on their 2023 individual income tax returns.

If a tax refund is due, the person claiming the refund must fill out IRS Form 1310: Statement of Person Claiming Refund Due to Deceased Taxpayer unless the person is a surviving spouse filing a joint return or a court-appointed personal representative.