Copyright (c) 2010 Brian Fricke

The death of a spouse can certainly be a painful and confusing time. Unfortunately, it can also cost the surviving spouse a lot of money in the form of overpaying on their taxes.

You probably already know that if you inherit an asset and then turn around and sell it, you are 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 is where we see mistakes being made by surviving spouses when a couple buys an asset and own it jointly. We will 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 are 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 is this? Because you have not 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 percent of the stock, but your spouse owned 50 percent 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 are aware of this provision so they don't unintentionally overpay on their taxes.

Because I can tell you this; the Internal Revenue Service 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!