Nothing can replace a dead spouse, but it's often desperately necessary to replace her income. Social Security, life insurance and other survivor benefits all help when a family breadwinner dies, but the Internal Revenue Service often expects a cut. The amount and type of survivor benefits determine whether you pay tax on them.
Most surviving-spouse benefits for Social Security are geared to spouses at least 50 years old. You can qualify at any age, though, if you're caring for your spouse's child or stepchild. The child must be under 16 or disabled and receiving benefits in his own name. To find out if your benefits are taxable, add together your adjusted gross income for the year, any nontaxable benefits you earn and half of your Social Security benefits. If the total is at least $25,000, 50 percent of your benefits are taxable; at $34,000, 85 percent are subject to tax.
If your spouse took out, say, a $200,000 life-insurance policy and the insurer pays you $200,000 when he dies, there's no tax. If the policy earned interest and you get more than the face value, the extra money is taxable income. You report the taxable part of a lump-sum payment the year you receive it. If you take the money in installments, IRS Publication 525 has the formula for figuring how much of each payment is taxable.
If you're married to a veteran, her retirement pay stops as soon as she dies. If she buys insurance during her time in service -- a Survivor Benefit Plan, in military-speak -- that guarantees you 55 percent of her retirement pay for as long as you live. Buying into this plan reduces your spouse's total retirement pay, though. Your Survivor Benefit Plan benefits are taxable, just as your spouse's retirement pay would be if she were still alive.
If your spouse's employer pays you after he dies, the type of pay determines if it's taxable. Any remaining salary, wages or commissions are taxable, just as if he'd lived to receive them himself. Death benefits under a workplace life insurance or accident policy are tax free if they're no more than the policy's value. Payments from an annuity or pension plan are taxed as life insurance is: If you get more than what it cost your spouse to pay for the plan, you probably owe tax.
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