Posted on September 24, 2016 by Jan Roberg

Filing as a Surviving Spouse: Five Things You Need to Know

The death of a spouse can create tax confusion.

Losing a spouse is difficult enough. You don’t need your taxes to be overly complicated.

One of the worst things I have to do in my job is to help people whose husband or wife has died file their tax returns. There’s nothing I can say or do to make the situation any better. If you should find yourself in this situation, first, I am sorry for your loss. Here are my tips to help you get through the filing process.

One: You are still considered married for the full year that your spouse died. That means you may file as married filing jointly, even though your spouse has died. (Had you divorced instead of being widowed, you would be considered single. Different rules for different situations.)

Two: For most couples, married filing jointly is the best filing status to use in the year of death. But there may be situations where you will want to file as married filing separately. If you have any concerns about your spouse’s tax liabilities, you should consult with a tax professional just to be safe.

Three: When you are signing the MFJ return, you will sign your name on your line, and write “filing as surviving spouse” on your spouse’s signature line. If you are paper filing your return, you’ll want to write “Deceased” across the top of the tax form. If you are e-filing, you’ll complete the box that shows the date of death. I always put “deceased” in the occupation box.

Four: If you still have children at home, you may claim the Qualifying Widow(er) status for two more years after your spouse died. Normally, a single person with children at home would claim the head of household filing status. Qualifying Widow(er) is a better tax rate so you want to use it if you can. You may not claim Qualifying Widow(er) if you do not have children at home. That’s a very common mistake. If you have no children remaining at home, then your filing status will become Single, not Qualifying Widow(er).

Five: If you get married again before the year ends (it does happen) you would file as Married Filing Jointly with your new spouse, and you would file a return for your deceased spouse as Married Filing Separately. (You could, if you choose to, file your own return as Married Filing Separately as well. Usually it is not the best filing status to claim.)

Posted on July 24, 2016 by Jan Roberg

Easiest Tax Quiz Ever!

Here’s an easy Tax Quiz.

1. Are you married? What’s your spouse’s name?

2. Do you have children? What are their names?

I told you this was an easy quiz. Now here’s the next part: same questions, but what would the answers have been three years ago? Any changes? If your answers have changed over the past few years, here’s a tougher question for you; did you change your will? How about your 401(k)? Your insurance policy?

You see, it happens to everyone. Our families change, we have children, we get divorced, we get remarried, people die. If we don’t manually go in and adjust who the beneficiaries are on our bank accounts, retirement plans, and such, then the money that we’ve worked so hard to save and care for our families might go to the wrong people.

It happens all the time. A man dies, and accidentally leaves a million dollar life insurance policy to his ex-wife. Perhaps his IRA goes to his dead brother. Or maybe he’s left his entire estate to his three eldest children completely leaving the youngest out of the will because he forgot to change it when the baby was born.

I’m not just giving you “what ifs”. These are all real examples that happened to real people that I know. The ex-wife had been divorced for five years, the dead brother had been gone for ten years, and the baby was twenty years old when her father passed away.

We all like to think that if we died, our family members would do the honorable thing and share accordingly. Hopefully they will, but it’s still better to put your wishes in writing with the proper documents. Even if your family does have the best intentions, and the highest level of integrity, if you don’t take care of assigning your beneficiaries, your assets will be left for state law to divide.

Let’s say you have no problem with your state laws and you agree with how the state determines the way your assets will be split. Fine. Of course, it could take years for the state to decide how to split your assets once you’re dead and your family could starve to death waiting. Let’s say you die and there’s no determination as to who your beneficiaries are. Generally, it takes about a year to get your assets out of probate, but I once worked on a case that took three years. For those three years, you know who got paid? I got paid for doing the tax returns, the financial manager got paid for handling the money in the account and the lawyers got paid a bundle.

You know who else got paid? The IRS got paid because the income from the assets in the account got taxed at the highest rate because we couldn’t pass any money through to the family. The family got nothing until the estate was closed. All that money eaten away by lawyers, number crunchers, and the IRS– what a waste. Is that really the choice you’d make?

So here’s your little Roberg Tax to do list. Check your life insurance policy. Check your retirement plan. Check your investment and bank accounts. And, check your will. Make sure that the people you have listed as your beneficiaries are the people that you want to receive your money when you die. If you’ve got the wrong people listed, you need to make some changes.

Your family loves you. They’d much rather have you be alive than be your beneficiary. But, because you love them too, make sure you take care of that paperwork.

Posted on June 12, 2016November 30, 2017 by Jan Roberg

Death, Taxes and IRAs

When people talk about “death” taxes, they usually mean “estate” taxes. Now, for 2017, there is no federal estate tax if your estate is under $5,490,000. So for most people, you don’t have to deal with estate tax. But IRAs are a different animal!

An IRA is considered to be taxable income. So – if you die, your beneficiary will have to pay tax on that IRA money. So, maybe you don’t care – since you’ll be dead anyway. But if you do care about leaving a taxable legacy to your heirs, here’s a few things to think about.

1. Roth IRAs are not taxable. Not to you, not to your heirs. (I always like Roth IRAs.)

2. A lot of people sign up for IRAs but they don’t know who the beneficiary should be (or they don’t have all the information they need to complete that part of the paperwork.) When they sign up they just put “estate” down in the beneficiary box. This is usually a bad thing. What happens is that your heirs wind up having to file a form 1041, an Estate and Trust tax return. Now, if you Google “estate tax” you’ll probably find all the tax rates on estates – and you’ll read the tax brackets for if you have over $5,450,000. (And that’s a form 706 – it’s a different animal.)

The 1041 form for income tax on estates and trusts is for the income earned by the estate – which includes your IRA income. The first $2,550 is taxed at 15%, the next bracket up to $6,000 is taxed at 25%, the next bracket up to $9,150 is at 28%, then up to $12,500 is at 33%, and anything over that is $39.6%. It doesn’t take a whole lot of money to kick your IRA income into the top tax bracket! Just to give you a comparison – a single person won’t hit the 39.6% tax bracket until he or she reaches $418,400 in taxable income.

So what does this mean? Well, if your heirs aren’t rich, they’re going to be better off if they inherit your IRA directly from you instead of from your estate.

3. If your goal is to leave a legacy to your children – life insurance is better than an IRA. (I can’t tell you how much I hate sounding like a life insurance salesman but it’s true.) Your IRA is your retirement account – it’s supposed to be money for you to spend during your retirement. In a perfect world, you spend it all before you die. (And of course, have enough to enjoy a long and happy retirement.) Life insurance provides your loved ones with tax free cash after you die.

This is really a personal decision on your part. Do you want to leave something for the kids or not? For some people that’s a major priority, for others, not at all. It’s your choice. But not matter what you decide, be sure to work with your financial advisor to make sure your heirs are properly listed as beneficiaries to your taxable retirement accounts.