Losing a spouse is one of life’s most profound and challenging transitions. Beyond the emotional toll, financial planning after losing a spouse requires navigating significant financial and tax changes, starting with shifts in Social Security benefits and tax brackets. These changes also encompass the rules for inherited property and retirement accounts. Understanding how these changes impact your finances is essential to making informed decisions. This guide outlines key considerations to help you plan with clarity and confidence.
You also want to consider steps you can take while you and your spouse remain alive. Factoring taxes into your financial planning after losing a spouse—as well as before—can provide meaningful benefits now and in the future.
1. Social Security Benefits After Your Spouse’s Death
Your Social Security benefits will change after your spouse’s passing. Understanding these changes is crucial to maintaining your financial stability.
Surviving Spouse Social Security Benefits
- Eligibility:
As a surviving spouse, you can receive Social Security benefits as early as age 60 (or age 50 if disabled). If you wait until your full retirement age (FRA), you may receive up to 100% of your deceased spouse’s benefit. Starting benefits before FRA will result in a reduced amount. - Impact on Your Own Social Security Benefit:
If you are already receiving Social Security benefits based on your work record, you may switch to survivor benefits if they are higher. The Social Security Administration will pay the larger of your benefit or your spouse’s survivor benefit—you cannot receive both. - The Benefit of Having the Higher Earnings Spouse Wait to Start Receiving Their Benefit:
As discussed further in this blog, one of the most common claiming mistakes couples make is deciding when to start receiving benefits as individuals rather than as a couple. When you are in your 60s, your life expectancy is likely in your 80s. Based on most actuarial projections, the chance at least one member of a couple in their 60s lives until 95 is about 25%. A surviving spouse receives the higher of the couple’s two Social Security benefits. This makes it even more essential to make claiming decisions as a couple rather than as an individual.
Taxability of Social Security Benefits
Social Security benefits may be subject to federal income taxes, and the taxable amount depends on your total income.
- For single filers, up to 85% of your Social Security benefits may be taxable if your combined income exceeds $34,000. For couples, when combined income surpasses $44,000, up to 85% of benefits may be taxable.
- For this purpose, combined income is calculated as your adjusted gross income (AGI) plus nontaxable interest and one-half of your Social Security benefits.
2. Inheriting Property, Including Stocks, from a Spouse
Inheriting property, such as real estate or investments, brings both financial advantages and responsibilities. Sound financial planning after losing a spouse involves understanding key tax implications like the step-up in basis, capital loss carryovers, and estate taxes.
Step-Up in Cost Basis
One significant tax advantage is the step-up in cost basis. Upon your spouse’s death, inherited assets typically reset to their fair market value as of the date of death.
- Example—Stock Owned Solely by Your Spouse: If your spouse purchased stock for $25,000, and it’s worth $60,000 at the time of death, your cost basis is adjusted to $60,000. If you later sell the stock for $75,000, you’ll only owe capital gains tax on the $15,000 of additional appreciation, not the $50,000 total growth.
- Example—Stock Owned Jointly by You and Your Spouse: If you purchased stock held in your joint account for $40,000, and it’s worth $100,000 at the time of death, your cost basis is adjusted to $70,000. ($20,000—one-half of the original basis, plus $50,000—one-half of the value at the time of death.) If you later sell the shares for $120,000, you’ll only owe capital gains tax on $50,000, or the amount by which the current price exceeds your new cost basis.
- Example—Community Property States: Suppose you and your spouse owned a home in California, a community property state, that you purchased for $200,000 that is worth $800,000 at the time of your spouse’s death. Unlike joint tenancy states, where only half the value gets a basis step-up, community property laws allow both halves to receive the step-up. If you sell at that value, your new cost basis would be $800,000, eliminating any taxable capital gain.
Capital Loss Carryovers
If your spouse had capital loss carryovers at the time of their passing:
- You can use capital loss carryovers on your joint return for the year of death.
- After that year, any remaining carryovers attributable to your spouse will expire.
- While the rules around capital loss carryovers can feel complex, they offer a valuable opportunity to reduce your tax burden. If you and your spouse owned assets jointly, you could potentially carry some of these losses forward to ease your financial transition. In general, if you held the assets generating the loss jointly, one-half of the loss carryforward can be allocated to the surviving spouse and carried over.
Effective financial planning after losing a spouse includes identifying and leveraging these opportunities to minimize taxes and protect your financial stability.
Estate Tax Implications
- Federal Estate Tax Exemption: In 2024, the federal estate tax exemption was $13.61 million per individual. This exemption will increase to $13.99 million in 2025. As a result, most estates are not subject to federal estate tax. During this challenging time, understanding the estate tax exemption rules can provide some peace of mind. By electing to transfer any unused portion of your spouse’s exemption, you can protect more of your assets for the future. To protect the unused exemption, you must file an estate tax return (Form 706) after one spouse dies and make a portability election on that tax return. You may need to make a similar election for your estate tax return.
- State Estate Taxes: Some states impose estate or inheritance taxes with much lower exemption thresholds. If you live in such a state, it’s essential to understand how this might affect your inherited property.
While inherited assets often provide financial benefits, some decisions, like selling a home, may have specific tax implications to consider.
3. Tax Rules for Selling a Home as a Surviving Spouse
Selling a home after your spouse’s passing is both an emotional and financial decision. The tax rules surrounding home sales for surviving spouses are designed to offer some relief, but timing and planning are crucial to maximizing benefits. As a result, including your home sale strategies in your financial planning after losing a spouse can help you reduce taxes and preserve wealth.
Home Sale Exclusion Rules
The IRS allows taxpayers to exclude a portion of the capital gains from the sale of their primary residence:
- Married Couples Filing Jointly: Up to $500,000 in capital gains can be excluded.
- Single Filers: Up to $250,000 in capital gains can be excluded.
As a surviving spouse, you can still claim the $500,000 exclusion if you sell the home within two years of your spouse’s death and meet the ownership and use requirements. After two years, you will be subject to the lower $250,000 exclusion limit.
Summary Home Sale Exclusion:
| Status | Capital Gains Exclusion | Eligibility Period |
| Married Filing Jointly | $500,000 | While both spouses are alive |
| Surviving Spouse | $500,000 | Within two years of death |
| Single | $250,000 | After two years |
Step-Up in Basis and Capital Gains
The step-up in basis provides additional relief by adjusting the home’s cost basis to its fair market value as of the date of your spouse’s death. This adjustment minimizes the capital gains tax you’ll owe upon sale.
- Example:
Suppose you and your spouse bought your home for $300,000, and it’s worth $700,000 at the time of your spouse’s death. If you do not live in a community property state, adjust the home’s cost basis to $500,000 ($300,000 x 50% + $700,000 x 50%). If you sell it for $750,000, your taxable gain is $250,000 (rather than $450,000). You can fully exclude this gain under the home sale exclusion rules.
Key Considerations
- Timing Matters: Selling within the two-year window allows you to benefit from the $500,000 exclusion, potentially avoiding taxes on more of the gain.
- Partial Use of the Exclusion: If you haven’t lived in the home for at least two of the last five years, you may qualify for a partial exclusion based on the percentage of time you lived there.
- Community Property States: In these states, both halves of the home’s value receive a step-up in basis, offering additional tax relief.
4. Inheriting an IRA or Retirement Account
Inherited retirement accounts, such as IRAs, have specific options and tax implications for surviving spouses. Incorporating these decisions into your financial planning after losing a spouse is vital for managing your long-term financial health.
Options for Inherited IRAs
- Roll the Account into Your Own IRA
- You can treat the account as your own, with RMD rules based on your age.
- The rollover must transfer the assets to the same account type—a traditional IRA to a traditional IRA or a Roth IRA to a Roth IRA.
- If the surviving spouse is younger, this type of rollover allows you to delay required minimum distributions (RMDs).
- Remain as the Beneficiary
- You can keep the account in your spouse’s name and base RMDs on their life expectancy.
- This may be beneficial if you need access to funds without penalty, your spouse has already started taking distributions, and you are younger than 59½.
- Once you are past 59½, rolling the account into your own IRA could be advantageous.
- Withdraw the Entire Balance
- While you can take a lump-sum distribution, the entire amount will be taxable as ordinary income in the year it’s withdrawn, potentially pushing you into a higher tax bracket.
Summary: Comparing IRA Inheritance Strategies
| Option | Advantages | Disadvantages |
| Roll Into Your Own IRA | Follows your RMD schedule, potentially delaying distributions. | Must match account type; early withdrawal penalties if younger than 59½. |
| Remain as Beneficiary | Avoids penalties for early withdrawals and more flexible access to funds. | RMDs based on spouse’s life expectancy; less long-term tax deferral. |
| Lump-Sum Withdrawal | Immediate access to all funds. | The entire balance is taxed as ordinary income in one year, potentially causing a higher tax bill. |
Tax Planning Tips for Inherited IRAs
- Roth Conversions: If your spouse’s account is a traditional IRA, converting some or all of it to a Roth IRA before exercising any of the above options for Inherited IRAs can reduce future tax burdens, particularly if you’re temporarily in a lower tax bracket. The sections below discuss tax filing status and use lower tax brackets, which also apply to any decision to complete a Roth conversion. Note that Inherited IRAs are ineligible for Roth conversions.
- Strategic Withdrawals: Spread distributions over several years to minimize tax impacts.
5. How Your Tax Filing Status Changes
Your tax filing status will change after your spouse’s death, which can impact your overall tax liability.
- Year of Death: If you do not remarry in the year your spouse dies, you can file jointly with your deceased spouse. Note that this applies even if your spouse passed away on January 1st.
- Two Years Following the Year of Death: You can use the Qualifying Surviving Spouse filing status if you do not remarry and have a qualifying dependent. Filing as a qualified surviving spouse provides a similar standard deduction and tax rates as married filing jointly status.
- Subsequent Years: If you meet the criteria, you will likely file as “Single” or “Head of Household.” Either filing status typically comes with higher tax rates and lower standard deductions.
- Impact on Income and Deductions: Transitioning to Single—or even Head of Household—filing status may result in higher taxes on the same income. It can also reduce eligibility for certain deductions and credits.
6. The Importance of Being Proactive: Using Lower Tax Brackets Before a Loss
Planning while you and your spouse are alive can help mitigate future financial and tax challenges.
Strategies to Utilize Lower Tax Brackets
- Roth Conversions: Convert traditional IRA funds to a Roth IRA while filing jointly to lock in lower tax rates. For example, assume you and your spouse have $500,000 in a traditional IRA and are currently in the 12% tax bracket. You convert $50,000 each year for 10 years to a Roth IRA. By spreading conversions over a decade, you stay in your current bracket and reduce the tax cost of your IRA. If you pass away, the remaining Roth IRA passes to your heirs tax-free, maximizing the legacy you leave behind. You can read this blog, How Roth Conversions Can Help You, Your Surviving Spouse, and Your Heirs, to learn more about the benefits of Roth conversions.
- Accelerate Income: Realize capital gains or take distributions from retirement accounts now. Doing so will help you avoid higher tax brackets later. Remember that withdrawing money from a retirement account before the age of 59½ will generally result in a 10% penalty.
- Maximize Deductions: Combine medical expenses, charitable contributions, or other deductible expenses into a single tax year. This approach can allow you to claim the standard deduction in some years and itemize your deductions in others to maximize the tax benefit you receive. The first point discussed in this blog expands on this approach’s potential benefits.
7. Benefits to Future Generations: A Legacy of Tax Efficiency
Thoughtful planning doesn’t just benefit you—it can create significant advantages for your heirs.
- Reduced Tax Burden: Converting traditional IRAs to Roth IRAs eliminates future taxes for your heirs.
- More Years of Tax-Deferred Growth: Your heirs generally have 10 years to withdraw the entire balance of an Inherited IRA or an Inherited Roth IRA. But, RMDs only apply to Inherited IRAs. Since you do not have to take RMDs from Roth IRAs, your heirs can potentially let the funds remain in an Inherited Roth for another 10 years. They can continue to grow tax-free during that time.
- Lower Estate Tax Exposure: Strategic planning can reduce the size of your taxable estate. It can also preserve more wealth for future generations. You pay taxes on Roth conversions as you complete them. Paying those taxes now can also reduce the size of your taxable estate.
- Simplified Finances for Heirs: Proactive planning minimizes the complexity of inherited assets, providing emotional relief and financial clarity.
- Example: If you convert $100,000 from a traditional IRA to a Roth IRA while still in a lower tax bracket, you may pay $12,000 in taxes now (assuming a 12% tax rate). However, if your heirs inherit the Roth IRA, they can withdraw the funds tax-free and allow any remaining balance to grow tax-free for up to 10 years. Paying taxes upfront reduces the taxable estate. It also helps avoid the higher tax rates your heirs might face.
Moving Forward With Confidence
Navigating these changes can feel overwhelming. However, taking informed steps can protect your financial well-being. Remember to take things one step at a time. Seeking professional support can provide clarity and allow you to focus on your well-being during this period of transition. We focus on guiding individuals through these transitions. Comprehensive financial planning after losing a spouse involves understanding Social Security benefits, managing inherited assets, and making proactive tax decisions. These are complicated issues. We’re here to help.
Don’t hesitate to reach out if you need guidance or personalized advice. Together, we can create a plan that honors your past while preparing you for the future. Let’s talk.
HAPPY HOLIDAYS to you and your families. May you have a joyous holiday season, and may 2025 be your best year yet.
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For firm disclosures, see here: https://apprisewealth.com/disclosures/
Phil Weiss founded Apprise Wealth Management. He started his financial services career in 1987 working as a tax professional for Deloitte & Touche. For the past 25+ years, he has worked extensively in the areas of financial planning and investment management. Phil is both a CFA charterholder and a CPA.
Located just north of Baltimore, Apprise works with clients face-to-face locally and can also work virtually regardless of location.
