Tax Tips: November/December 2022

Should you file a joint return when your spouse dies?

When a spouse dies, the surviving spouse must determine whether to file joint or separate tax returns for that year. Generally, a surviving spouse is permitted, but not required, to file a joint return for the year of death (provided he or she doesn’t remarry during the year). Each option has pros and cons, depending on the facts and circumstances. In many cases, a joint return results in a lower overall tax liability by virtue of joint tax rates, larger tax credits for joint filers and tax-planning strategies unavailable to separate filers. For example, the surviving spouse could sell assets that have declined in value to generate losses that can be offset against the deceased’s capital gains.

Potential disadvantages of a joint return include exposing the deceased’s estate to the surviving spouse’s tax liabilities and reducing the value of deductions subject to adjusted gross income (AGI) limits. For example, if the surviving spouse has significant medical expenses, which are deductible to the extent that they exceed 7.5% of AGI, combining the spouse’s incomes on a joint return could reduce the value of those deductions.

Research credit expanded for small businesses

The Tax Cuts and Jobs Act (TCJA) made it easier for start-up businesses, which often have little or no taxable income, to benefit from research credits. The law permitted start-ups, defined as businesses that are less than five years old and have less than $5 million in gross receipts, to claim research credits against up to $250,000 in Social Security payroll tax liability. The Inflation Reduction Act (IRA) doubles this benefit: For tax years beginning after 2022, eligible businesses may apply up to $250,000 in research credits toward their Social Security payroll tax liability and up to an additional $250,000 toward their Medicare payroll tax liability.

Limit on excess business losses extended

The TCJA set a cap on business loss deductions by noncorporate taxpayers. For 2018 through 2025, the TCJA limits deductions for net business losses from sole proprietorships, partnerships and S corporations to $250,000 ($500,000 for joint filers). Losses in excess of those amounts (which are adjusted annually for inflation) may be carried forward to future tax years under the net operating loss rules. Although the CARES Act suspended the limit for the 2018, 2019 and 2020 tax years, it’s now back in force and has been extended through 2028 by the IRA. Businesses with significant losses should consult their tax advisors to discuss the impact of this change on their tax planning strategies.

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