Losing your spouse can be one of the most emotionally devastating moments to go through. And it also can bring about unintended financial hardship.
This is part of what financial advisers call the widow’s tax penalty. It essentially means that the surviving spouse could face lower income, higher tax rates, and higher health care costs through surcharges on Medicare premiums.
What Is the Widow’s Tax Penalty?
The widow’s tax penalty refers to a higher tax burden on a surviving spouse. But we’ll look at it as a wider-reaching financial obstacle. Here’s what it can trigger.Lower Income
If a couple was collecting Social Security benefits, the loss of one spouse would eliminate one check. The surviving spouse would get the higher of their own retirement benefit or the separate survivor benefit, which is based on the deceased’s earnings record. But it’s still likely to result in a major loss of income.Higher Taxes
After one spouse passes away, the surviving spouse may eventually need to change their filing status. For one year following their spouse’s death, the survivor is still allowed to file under the more favorable married filing-jointly status. This can stretch to two years if the couple had qualifying children. But once either period ends, the survivor would most likely need to file single.This can push the survivor into unfavorable tax brackets.
For example, a married couple filing jointly in tax year 2026 with annual income of $100,000 would be in the 12 percent tax bracket. If one spouse passes away and income drops to $51,000, the survivor would end up in the 22 percent tax bracket as a single filer.
Plus, the survivor would see their standard deduction cut in half. The 2026 standard deduction is $32,200 for those married filing jointly and $16,100 for single filers.
RMDs
In many cases, the surviving spouse would be the beneficiary of retirement accounts like traditional IRAs and 401(k)s. These involve required minimum distributions (RMDs), which are minimum withdrawals most investors must make every year once they reach age 73.Higher Medicare Premiums
High earners would owe surcharges on Medicare Part B and Part D premiums through the income-related monthly adjustment amount (IRMAA). These are based on MAGI. And IRMAA income thresholds are generally lower for single filers than for married couples filing jointly.Roth Conversions
While the survivor can still file jointly, they may be able to convert all or partial funds from a traditional IRA into a Roth IRA and owe minimal income taxes on the converted amount.This move could reduce future RMDs or get rid of them. Roth IRAs in particular don’t take RMDs.
Many financial advisers also recommend you consider a Roth conversion between the time of early retirement and before age 73, as this is a period when income would be theoretically low and so would your tax burden.
Tax Diversification
If you’re nearing retirement, you may want to consider tax diversification. This means having savings in different accounts with different tax treatments. This can include taxable brokerage accounts, tax-deferred accounts like traditional IRAs and tax-free accounts like Roth IRAs.QCDs
Once you reach age 70 1/2, you can donate to an Internal Revenue Service-eligible charity directly from your traditional IRA. The donation can take the place of your RMD and it won’t be counted as taxable income. The move could lower your tax bill and prevent your taxable income from reaching levels that would trigger Medicare surcharges or taxation of your Social Security benefits.Utilize an HSA
If you have a high-deductible health plan, you can pair it with a health savings account (HSA). These savings vehicles offer a triple tax benefit. Your contributions are tax deductible, earnings in the account grow tax-free and withdrawals are tax-free for qualified health care expenses. So they essentially reduce your taxable income while helping you save for future health care costs, which could be a major burden for retirees.Strategize Around Social Security
Planning around Social Security benefits is essential for any married couple in or nearing retirement. Benefits are calculated using up to 35 of your highest-earning years.And if one spouse earns significantly more than the other, it’s typically recommended that this spouse delays collecting benefits until they reach full retirement age or 70. And the lower-earning spouse could begin collecting benefits earlier. This ensures that the couple could receive income, while the higher-earning spouse maximizes their benefits. Plus, it would increase the survivor benefit.
The Bottom Line
Losing a spouse is an emotionally gut wrenching event. And it can unfortunately also leave you to financial challenges associated with the so-called widow’s tax penalty. But you can make a few moves to minimize this burden such as timing Roth conversions, engaging in tax diversification, and utilizing HSAs. But potential strategies would differ based on the unique circumstances of individuals. So it can benefit to work through these strategies with a qualified tax adviser.The views and opinions expressed are those of the authors. They are meant for general informational purposes only and should not be construed or interpreted as a recommendation or solicitation. NTD does not provide investment, tax, legal, financial planning, estate planning, or any other personal finance advice. NTD holds no liability for the accuracy or timeliness of the information provided.
From The Epoch Times