Till death do us part: dealing with carryovers when a spouse dies.

• Author: Lewis, Jan F.

CPAs are involved in all aspects of their clients' personal and financial lives--and when a client dies, they can be one of the most valuable advisers to the family. Although the increased estate tax exemption in recent years has minimized the number of taxable estates, numerous tax issues still must be addressed when a taxpayer dies. One of those issues is dealing with carryovers that the taxpayer or spouse may have had at the time of his or her death.

What happens to those carryovers--whether they are net operating losses (NOLs), passive losses, charitable contributions, or myriad other deductions or credits that have not been used in prior years? How can the CPA make sure that the correct amounts are used on the decedent's final tax return? How does the CPA ensure that he or she is capturing the necessary information each year to avoid any problems at death? And are there any planning opportunities that could benefit a surviving spouse's tax position?

Generally, carryovers can be used on the decedents final income tax return but are lost thereafter. For a single taxpayer, this is fairly straightforward. It is more complicated when the decedent is married and files jointly. When the surviving spouse files a joint return with the decedent for the year of his or her death, the full amount of carryovers can still be used in the year of death, even if they are used to offset income of the surviving spouse that was generated after death. However, after the year of death, the carryovers must be examined carefully to determine which carryover amounts, if any, belonged to the decedent, because any amounts attributable to the decedent are lost and cannot be transferred to the surviving spouse.

For a couple who have filed a joint return for many years, there could be several types of carryovers coming into the year that one spouse dies. Each carryover must be allocated to each spouse. The following is a brief summary of how each carryover should be attributed to the decedent and the surviving spouse.

NOL carryovers: NOL carryovers are deductible only by the taxpayer who sustained the losses, and they cannot be transferred to or used by another taxpayer, including the surviving spouse. NOLs generally can be traced to specific business interests, so unless both spouses have losses, the CPA should be able to attribute the carryover to the spouse who generated the loss. For a sole proprietorship, the NOL is attributed to the spouse who is the sole...