FORM 1040

Despite your spouse’s death, for a limited time you may still take your late spouse’s exemptions and file a joint tax return. You are eligible to elect “married filing jointly” status in the year of your spouse’s death, which in most cases produces the best tax result.

However, you may choose to file separately (“married filing separately”) if your late spouse was in trouble with the IRS, or you believe he may have committed tax fraud in the year of his death. If you were to file jointly, you would expose yourself to his tax debts or even his fraud.

In some cases, married filing separately may even generate more Schedule A deductions. That would be the case if there were large medical expenses incurred in the year of death. Your accountant should prepare Form 1040 using each status to determine which filing status nets you the best result. If you file jointly, you must sign both personally and as your spouse’s personal representative.

You may file jointly for two tax years following the year of your spouse’s death as a “qualifying widow or widower with dependent child,” if all of the following conditions are met:

1. You were entitled to file a joint return in the year of death, whether or not you actually did;
2. You have not remarried;
3. You have a child, stepchild or foster child that qualifies as your dependent; and
4. You provide more than one-half the cost of maintaining your home, which is the principal residence of the child. If the above conditions are not met, you must file as a “single” taxpayer, and will likely pay a significantly higher tax.

Example: Mr. Brown’s wife died in 2001. As of 2002, Mr. Brown had not remarried and continued throughout 2002 to maintain a household for himself and their child. In 2001 Mr. Brown was entitled to file as married filing jointly with his deceased wife. For year 2002 he again qualifies for the more advantageous joint tax tables. He will be eligible to file a joint return for 2003 if he continues to meet the requirements described above.

When filing Form 1040 in the year of death (or short Form 1040A for taxpayers with minimal deductions and taxable income of less than $50,000), several disclosures must be made. In the name and address section on the top of Form 1040, you must indicate that your spouse is “deceased” and enter the date of death.

Additionally, in the signature block on page 2 you must also indicate, “deceased.” Your signature should be followed by the words “filing as surviving spouse.”

The following is an example of the relevant portions of pages one and two of Form 1040:

Unless you moved in the year of your spouse’s death, Form 1040 is filed with the same IRS center that you filed with the previous year. If you are not your spouse’s personal representative, Form 1040 is filed with the IRS center determined by the residence of the personal representative.

If you did not remarry, your joint return for the year of death will include your late spouse’s income and deductions up to the date of his death. It will also include your income and deductions for the entire year. Income from your spouse’s employment, retirement plans, or other income paid to you in the year of death is included on the joint return. Income from your spouse’s employment, retirement plans, or investments paid to your late spouse’s estate or trust must be reflected on Form 1041 discussed below.

1040 ESTIMATED TAX PAYMENTS

The passing of your spouse may affect both your level of income and tax withholding. If your spouse was working, income tax was withheld from his or her paycheck. Naturally, once the paychecks stop so does the withholding.

After your spouse’s death, you may begin to live off of other sources of income such as retirement distributions, or proceeds from the sale of investment assets. If tax is not withheld from these new sources of income, you could be subject to withholding penalties.

Federal and state law requires that either 100% of the prior year’s tax liability (or approximately 110% percent for individuals with more that $150,000 of adjusted gross income) or at least 90% of current annual tax liability either be withheld from payroll or paid to the government in what are called “quarterly estimated payments.”

Failure to properly withhold can result in substantial penalties. Unfortunately, the death of your spouse does not exempt you from the withholding rules. Estimated taxes are paid four (4) times during the year: April 15th, June 15th, September 15th, and the following January 15th.

Considering the substantial income fluctuations that naturally occur in the year of death, it is likely that estimated payments will be necessary.