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Is AZ Tax Credit Carried Forward When Spouse Died?

by | Apr 7, 2022 | Blog, Tax Credits

AZ tax credit

 

Charity and AZ tax credit go hand and hand. That’s why many are encouraged to donate to a Qualified Charitable Organization as an individual or as a couple, as the donation you make may be eligible for tax credits equal to the amount of your donation when filing your Arizona state taxes. Also, it means a dollar-for-dollar reduction in taxes.

However, note that the Arizona Charitable Tax Credit is only available to individuals or married couples who file jointly. The allowable credit limit for contributions to a Qualified Charitable Organization for single taxpayers is $400, while the permissible credit limit for joint filers is $800 for contributions to Qualified Charitable Organization. Individuals and married couples filing separately in Arizona can claim a $400 AZ tax credit for donations made to a Qualified Charitable Organization. In comparison, married couples who file jointly can claim an $800 AZ tax credit for the same contribution.

 

AZ tax credit

 

What is AZ Tax Credit Carryforward?

You as a taxpayer may find yourself with unused tax credits in certain circumstances, which is where the AZ tax credit carryforward comes into play. An AZ tax credit carryforward, also known as tax credit carryover, applies unused tax credits such as passive activity losses, capital losses, charitable deductions, and net operating losses to the following tax year. However, remember that you may carry over only that portion of the credit you do not apply to tax. You cannot carry over any amount you gave that was more than the maximum amount allowed as a credit. In addition, the unallocated tax credits can be carried forward to a maximum of five years in a row and a maximum of $10,000.

This is all applicable in the different AZ tax credit types available such as tax credits from a Qualified Charitable Organization, except for the Arizona Military Family Relief Fund Credit. Be also mindful that  Arizona State Tax Credits cannot exceed a taxpayer’s current tax liability.

 

What Happens To Your AZ Tax Credit After the Death of a Spouse?

But what happens to these tax credit carryovers if one of the spouses dies before the other? Tax credit carryovers are possible when filing for the decedent’s final income tax return as a single taxpayer, but they are usually lost on subsequent income tax returns. However, in the event of joint filers, the situation is different. If there are any carryovers from the prior year, both spouses can use them to offset income received after the death or by the surviving spouse. However, thoroughly evaluated AZ tax credit carryovers are a must in subsequent tax years. If it belongs to the dead, the AZ tax credit carryovers are non-transferrable to the surviving spouse.

However, evaluating AZ tax credit carryovers can be difficult for the surviving spouse, especially if they are not directly involved. As a result, the couple should know what kind of charity and tax benefits they would gain from such efforts. The couple’s original contributions calculated were filed as separate returns for the contribution year to evaluate the carryover amount attributable to the surviving spouse. The surviving spouse’s portion of the carryover is the amount that bears the same ratio to the overall carryover as the spouse’s carryover bears to the total contribution carryovers of both spouses on an individual basis. Unused deceased spouse’s carryovers in the year of death are lost.

 

AZ tax credit

 

Evaluating Types of Carryovers After the Death of a Spouse

Since total carryovers must be determined and allocated to each spouse, it is good to understand what would happen if a spouse died to the common types of carryovers listed below, not just those from a Qualified Charitable Organization.

  • Net operating losses carryovers – NOL carryovers are nontransferable and cannot be used by another taxpayer, including the surviving spouse. Unless both spouses experience losses, the CPA should attribute the carryover to the spouse who incurred the loss.
  • Carryovers of capital losses – Capital loss carryovers are also only deductible by the individual who lost them. Annual monitoring of capital loss helps discover who caused it. The remaining spouse receives half of the loss if a married couple sells securities, real estate, or other jointly owned capital assets at a loss. If only one spouse possessed the asset, the carryover is either forfeited or included in the filed joint return in the year of death.
  • Passive activity loss (PAL) carryovers – All PAL carryovers from the decedent’s final joint return for the year of death are allowed. The carryover amount must be decreased by the excess of the transferee’s (heir’s) basis over the decedent’s adjusted basis soon before death. In other words, the heirs receive the tax benefit from the step-up basis; therefore, the decedent cannot claim the loss. No carryover is allowed if the decedent’s PAL carryover is less than the step-up basis.
  • Charitable contribution carryovers – Unused contribution carryovers also expire. Also, there are excluded carryovers in the final joint return divided between the spouses. The couple’s initial contributions must be adjusted as if they filed separate returns for the contribution year. The surviving spouse’s share equals the total carryover for both couples. The carryover of the deceased spouse is lost. However, make sure that the given carryover is from an approved Qualified Charitable Organization which provides receipts. Otherwise, it would not count.
  • Other carryovers – Other carryovers must be split between the decedent and the surviving spouse, such as investment interest expense, foreign tax credits, and AMT credits. Just like what happens typically, these carryovers are unusable after the decedent’s death year. An AMT credit carryover cannot be used on a widow’s separate return in the year following her husband’s death because he incurred the AMT in the year preceding his death, giving rise to the AMT credit.

 

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Charity and tax benefits are highly beneficial to the less fortunate. This includes taxpayers who have been in a bad situation and still have unused tax credits, such as those from a Qualified Charitable Organization. An example of this situation is the death of a loved one, especially a spouse, which can be devastating and stressful, especially if there is little to no time to make financial arrangements.

So start making a habit of tracing the deduction, loss, carryovers, or credit to your and your spouse’s tax responsibilities and start donating to a Qualified Charitable Organization, as this will significantly assist you in deciding how to handle the carryovers in the future, whether in Arizona or elsewhere. For more information, visit  Children’s Care Arizona, an operating Qualified Charitable Organization.