Surviving Spouses – Don’t Make This Mistake And Overpay Your Taxes
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by: MattCBA
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The death of a spouse can be a painful and confusing time. Unfortunately, it can also cost the surviving spouse big money in the form of overpaying on their taxes.
You probably know that if you inherit an asset and then turn around and sell it, you’re only taxed on the increased value from the date that you inherited the asset. For instance, if you inherit a stock worth $100 from a friend or family member and they only paid $10 for it, you can turn around and sell the stocks at $100 and pay zero tax on the $90 profit!
So here’s where we see mistakes being made by surviving spouses when a couple buys an asset and own it jointly. We’ll use that same $100 stock as an example.
Say you and your spouse buy stock in a joint account for $10. Now it’s worth $100. Your spouse passes away and you want to sell the stock. What are your profits for tax purposes? If you’re like a lot of people, you instinctively remember what you paid for the stock –$10. And when you report that profit you report it as $90. Which is wrong!
You would actually be over-reporting your taxable income. Why? Because you haven’t adjusted your tax basis (cost) as a surviving spouse. When you stop and think about it, you actually inherited a portion of that stock. You owned 50% of the stock, but your spouse owned 50% of the stock.
What this boils down to is the fact that you get a stepped-up basis on your spouse’s interest in the asset. For that same $100 stock, you should adjust your cost to $55. Meaning you would only pay tax on a $45 profit.
This is a common mistake we see too many surviving spouses make when it comes to selling assets that were accumulated during their marriage. If you have a friend or family member who is a widow or a widower, make sure that they’re aware of this provision so they don’t unintentionally overpay on their taxes.
Because I can tell you this; the IRS is not going to call you up and say, “Hey wait a minute, you paid too much. Here’s the correct amount.” Although they’ll be more than happy to contact you and let you know if they think you underreported or under-paid!
www.BrianFricke.com
About the Author
About Brian L. Fricke, CFP®: Brian Fricke is the Author of “Worry Free Retirement, Do What You Want, When you Want, Where You Want”. For the last 6 years in a row Brian and his company – Financial Management Concepts – have been named one of America’s Top Wealth Managers. Orlando Business Journal has named his firm one of the top financial planning companies in Central Florida. Financial Advisor magazine – an industry trade journal- has recognized him as one of the leading financial planning firms in America. If you’ve been in Central Florida over 10 years, you may have heard him on the radio. He used to host his own show on WDBO radio. He’s also served on the City of Winter Springs Board of Trustees Pension Fund. Brian is a Certified Financial Planner. His firm – Financial Management Concepts – is a Fee Only Financial Planning firm. They currently manage over $98 million of investment assets for a select community of clients. Brian and his team have worked with retirees and pre-retirees from companies like AT&T, Sprint, Harris, Lockheed Martin and Siemens/Westinghouse. For more information, please visit http://www.BrianFricke.com
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