Tax Carryovers When a Spouse Dies | LBMC (2024)

As mentioned above, three main tax carryovers that joint filers may have in the year of death are net operating losses, capital losses, and charitable contributions. The tax treatment of each will be discussed below.

1. Net Operating Losses

Revenue Ruling 74-175 helps to address this issue. The Revenue Ruling indicates that only the taxpayer who sustains the loss is entitled to take the deduction. Thus, the loss cannot be transferred to another taxpayer including the surviving spouse. The net operating loss will need to be traced to the business interest that created it. If owned by the decedent, then the loss is only available on the final income tax return. Any amount not completely used will be lost on subsequent income tax returns filed by the surviving spouse.

2. Capital Loss Carryovers

Similar to net operating losses, Revenue Ruling 74-175 helps to address this issue. Only the taxpayer who sustains the loss is entitled to take the deduction. Thus, sales of capital assets will require a tracing to the original owner in order to determine who is entitled to the capital loss carryover. 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.

3. Charitable Contribution Carryovers

Charitable contribution carryovers allocated to the decedent will also be lost upon the death of the taxpayer if not used on the final income tax return. IRC Regulation Section 1.170A-10(d)(4)(i) addresses charitable contribution carryovers upon the death of a spouse. Per the regulations, a joint filer’s original charitable contribution must be recomputed as if two separate income tax returns were filed and not a joint tax return for the year of contribution. Any amount allocable to the decedent is lost on a subsequent income tax return filed by the surviving spouse.

Tax Carryovers When a Spouse Dies | LBMC (2024)


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.

What happens to capital loss carryover when one spouse dies? ›

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.

What are the IRS rules for surviving spouse after death? ›

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.

What is an example of a tax loss carry forward? ›

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.

Can I use more than $3000 capital loss carryover? ›

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.

What is the tax loss carryforward rule? ›

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.

Do widows pay more taxes after spouse dies? ›

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.

How does death of spouse affect tax return? ›

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.

Do I get a full step up in basis when my spouse dies? ›

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.)

What is the widow's tax trap? ›

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.

How long can you file taxes as married after spouse dies? ›

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.

Why are capital losses limited to $3000? ›

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

Do Schedule C losses carry forward? ›

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.

What is the net operating loss carryforward statement? ›

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.

How are carryover losses treated in the final year of an estate? ›

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.

Do capital losses pass to beneficiaries? ›

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.

What happens to a tax refund when someone dies? ›

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.

Which losses can be carried forward? ›

Rules to carry forward losses:
SectionLosses can be carried forwardTime limitation for carry forward
73Loss from speculative business4 Years
73ALoss from specified businessNo time limit
74Short term capital loss8 Years
74Long term capital loss8 Years
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