Grieving a lost spouse is hard enough, but you may feel another shock when tax time comes around.
Without planning, a surviving spouse may likely be surprised to find their taxes have risen sharply despite lower income because of an inherent “widow’s penalty” in the tax code. The penalty occurs when a surviving spouse’s tax status reverts to single from married filing jointly. Standard deductions shrink and tax brackets compress – a double-whammy for widows and widowers.
Not only could surviving spouses see higher taxes, but they could also face higher Medicare premiums and Social Security tax because both have income thresholds. More often, women suffer the penalty because women tend to live on average five years longer than men, said Katie Carlson, head of wealth strategy at Bank of America Private Bank.
“It’s a tough one,” said Carlson. “There’s no way to completely avoid it.”
But there are ways to mitigate it, she said.
Here’s how surviving spouses are penalized:
Planning early – before someone dies and before required minimum distributions and Social Security – is always preferred, advisers said. But if you didn’t, you may still have a small window to do some maneuvering.
“The first year is important,” said Patrick Simasko, elder law attorney and financial advisor at Simasko Law. “If I die today, we only have five months’ worth of income from me but have the married couple tax deduction for this year. You should pull out as much as you can while you’re in the better tax bracket.”
Generally, joint status only lasts the year the spouse dies, but in certain circumstances, widows/widowers may have longer. A qualifying surviving spouse (QSS) who hasn’t remarried and has a dependent child or stepchild can file jointly and claim the larger standard deduction for two years after death, said Richard Pon, certified public accountant in San Francisco. After the QSS period ends, they may be able to file as head of household, which has a higher standard deduction than single filing but is usually lower than QSS.
Take advantage of the lower tax rate with some Roth conversions, said Shannon Stevens, managing director and head office at Hightower Signature Wealth.
Also, review IRAs and taxable accounts and consider moving into more tax-efficient investments like index funds and exchange-traded funds (ETFs) to minimize capital gains distributions and lower taxable income, Stevens said.
Charitable contributions lower your income, too. If you’re at least 70.5 years old, a qualified charitable distribution can be made from a retirement account. If you do it at age 73 or older, it can count for your required minimum distribution.
Medora Lee is a money, markets, and personal finance reporter at USA TODAY. You can reach her at mjlee@usatoday.com and subscribe to our free Daily Money newsletter for personal finance tips and business news every Monday through Friday.