What are the tax problems associated with payments received by a wife from her deceased husband's employer? (Assume the wife renders no services to the employer.)

Answer 1

An amount paid in respect of compensation owed to the employee at the time of his death is taxable to the spouse, just as the amount would have been taxable to the decedent if he had received the money prior to death. Additional noninvested amounts paid by the employer probably should be totally excluded from the spouse's income as a gift. However, the IRS generally considers such payments to be compensation for past services rather than gifts.

Payments received from the employer's qualified pension or profit sharing plan are subject to taxation. Also, if the employee contributed to the pension and profit sharing plan, the beneficiary is allowed to treat this amount as a nontaxable recovery of capital.