When your spouse dies, whatever life insurance payments or other death benefits has set up become available to you. Depending on the circumstances and terms, it may also pay off for the IRS. Many employers offer death benefits as part of the company's retirement planning, but some of the money may go to the government instead of you.
The payout from insurance when someone dies may be taxable. If your spouse named you as beneficiary of a $150,000 policy, the $150,000 is tax free. If the policy earns interest, however, any extra money you get above the face value is taxable income. If you take your insurance payment in monthly installments, you have to calculate how much of each payment is interest. IRS Publication 525 explains how the math works.
If your spouse's employer paid some or all of the cost of an accident insurance policy, the benefits are normally somewhat or completely taxable. For example, if your spouse paid 30 percent of the cost, 70 percent of the benefits he gets if he's injured are taxable income. Death benefits are different, though. If the accident policy kicks in because it covered your spouse's accidental death, the same rules apply as for life insurance. If all you get is the flat death benefit, with no interest, there's no tax.
Pension and Annuity
Death benefits bought under a pension or an annuity work much the same as life insurance. They're not taxable unless they exceed the value of the contract. If the death benefit is more than that, then the IRS gets a cut. The number-crunching guidelines for figuring this one are in Publication 575. They apply whether you're receiving benefits that would have gone to your spouse, or a survivor benefit reserved for you.
There are many other types of survivor benefits your spouse's employer may pay you besides those in the retirement plan. If your spouse had any wages due when he died, for instance, you probably get the money. In that case, it's as taxable to you as it would have been to your spouse. The same applies to payments you get in the form of salaries, commissions, bonuses and your spouse's cut of the company profit-sharing plan.
A graduate of Oberlin College, Fraser Sherman began writing in 1981. Since then he's researched and written newspaper and magazine stories on city government, court cases, business, real estate and finance, the uses of new technologies and film history. Sherman has worked for more than a decade as a newspaper reporter, and his magazine articles have been published in "Newsweek," "Air & Space," "Backpacker" and "Boys' Life." Sherman is also the author of three film reference books, with a fourth currently under way.