When a spouse dies, surviving spouses often face complicated questions about what happens to tax carryovers on their joint return. Key items include net operating losses (NOLs), capital loss carryovers, and charitable contribution carryovers—and many of these amounts do not transfer to the surviving spouse.
This overview explains how tax carryovers when a spouse dies are treated in the year of death and in later years, and why it is critical to determine which spouse owns each carryover.
Key Takeaways:
- Key tax carryovers when a spouse dies include net operating losses (NOLs), capital losses, and charitable contribution carryovers.
- Carryovers attributable to the deceased spouse are generally lost after the final return.
- Determining which spouse owns each carryover is critical for proper tax treatment.
- Professional guidance can help avoid unexpected tax consequences.
Handling Estate Tax Returns
The key question for each tax carryover is: which spouse actually owns it?
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. This can include net operating losses, capital losses, and charitable contributions.
- Year of Death – What should be done with tax carryovers in the year of death?
- Subsequent Year – Who owns the carryovers in the subsequent year of death?
These questions will help determine the proper completion of the surviving spouse’s tax return including the proper deduction of them.
Estate Tax Carryover
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.
As mentioned above, the main tax carryovers that joint filers may have in the year of death are net operating losses, capital losses, and charitable contributions. The tax treatment of each will be discussed below.
Key Tax Carryovers to Consider When a Spouse Dies
1. Net Operating Losses (NOLs) After a Spouse’s Death
Net operating losses (NOLs) arise when business deductions exceed income and can typically be carried forward to offset future income.
Revenue Ruling 74-175 helps to address this issue. The Revenue Ruling indicates that if the deceased spouse had any individual NOLs, these can not be transferred to the surviving spouse. However, any joint NOLs (if applicable) can be carried forward.
Only the taxpayer who sustains the loss is entitled to take the deduction. Thus, the loss cannot be transferred to another taxpayer including the surviving spouse.
The NOLs will need to be traced to the business interest that created it. If owned by the decedent, then the loss is only available on the final income tax return. Any amount not completely used will be lost on subsequent income tax returns filed by the surviving spouse.
Proper documentation is crucial to substantiate NOLs. Keep records of tax returns and any NOL calculations.
2. Capital Loss Carryovers After a Spouse’s Death
Similar to net operating losses, Revenue Ruling 74-175 helps to address this issue. Only the taxpayer who sustains the loss is entitled to take the deduction. Thus, sales of capital assets will require a tracing to the original owner to determine who is entitled to the capital loss carryover.
If the decedent, then the loss is only available on the final income tax return. If the surviving spouse, then the loss can be carried forward to subsequent income tax returns.
3. Charitable Contribution Carryovers for Joint Filers
Charitable contribution carryovers allocated to the decedent will also be lost upon the death of the taxpayer if not used on the final income tax return.
IRC Regulation Section 1.170A-10(d)(4)(i) addresses charitable contribution carryovers upon the death of a spouse. Per the regulations, a joint filer’s original charitable contribution must be recomputed as if two separate income tax returns were filed and not a joint tax return for the year of contribution.
This means the contribution is effectively split between spouses to determine what portion belongs to the deceased versus the surviving spouse.
Any amount allocable to the decedent is lost on a subsequent income tax return filed by the surviving spouse.
Guidance for the Surviving Spouse
The death of a spouse can certainly be traumatic and life-changing. It can also bring some significant difficulties when preparing the final income tax return for the decedent as well as the subsequent income tax returns for the surviving spouse.
Navigating tax carryovers when a spouse dies can be complex, especially when determining which losses and deductions remain available.
LBMC’s tax professionals can help you review NOLs, capital loss carryovers, and charitable contributions, properly allocate them between spouses, and avoid unexpected tax consequences. Connect with our team to discuss your situation.
Content provided by LBMC tax professional Ben Alexander.
LBMC tax tips are provided as an informational and educational service for clients and friends of the firm. The communication is high-level and should not be considered as legal or tax advice to take any specific action. Individuals should consult with their personal tax or legal advisors before making any tax or legal-related decisions. In addition, the information and data presented are based on sources believed to be reliable, but we do not guarantee their accuracy or completeness. The information is current as of the date indicated and is subject to change without notice.
Tax Carryovers When a Spouse Dies FAQs
What happens to tax carryovers when a spouse dies?
Tax carryovers such as NOLs, capital losses, and charitable contributions can be used on the final joint return but are generally lost if they belong to the deceased spouse and are not fully used.
Can a surviving spouse use a deceased spouse’s NOL carryover?
No. NOLs belong to the taxpayer who generated them and do not transfer to the surviving spouse unless they were jointly generated.
Do capital loss carryovers transfer to a surviving spouse?
Only if the losses belong to the surviving spouse. Losses attributable to the deceased spouse are generally lost after the final return.
What happens to charitable contribution carryovers after death?
They must be reallocated between spouses as if separate returns were filed. Any portion belonging to the deceased spouse is lost if unused.
Why is it important to track ownership of carryovers?
Because only the taxpayer who generated the loss or deduction can use it, determining ownership is critical for accurate tax reporting.
