A surviving spouse will have many tax-related issues to deal with upon the death of their spouse. They may have to file an Estate tax return which includes gathering asset and debt related information. They may work with an attorney for probate of the Estate or transfer of Estate assets. One item that may be overlooked but could cause a great headache during the individual income tax preparation of the spouse is related to tax carryovers – including net operating losses, capital losses and charitable contributions. What should be done with them in the year of death? Who owns them in the subsequent year of death? These questions will help determine the proper completion of the surviving spouse tax return including the proper deduction of them.
In the simplest terms, carryovers can be included on the decedent’s final income tax return but are generally lost on subsequent income tax returns. This is a rather easy situation for a single taxpayer. What is not used on the final income tax return will simply go away. It is a bit more difficult for joint filers. In the year of death, any carryovers are still available to both spouses even to offset income after the date of death or earned by the surviving spouse. The tax carryovers need to be examined carefully in subsequent tax years, as carryovers attributable to the decedent are not available to be transferred to the surviving spouse.