Beware of higher taxes if you are a recent widow or widower

As if losing a spouse is not hard enough from an emotional, mental and potentially even physical perspective, there can be unwanted financial consequences as well.

When married couples are retired and one spouse dies, the surviving spouse’s expenses may not go down as much as you would think. Chances are mortgage or rent expenses won’t change and neither will maintenance costs. Utility expenses may decrease, but only by a little. There may be one less car and auto insurance to pay for and there will be less in healthcare expenses and a bit less food and clothes to buy. However, to increase social connection and interaction, the surviving spouse may eventually spend more on dining out, doing hobbies and activities, traveling, etc. All said and done, the surviving spouse’s expenses may see only a modest decrease. 

Depending what income sources the couple had before the first spouse’s death, there could potentially be a sizable drop in income. If both spouses were receiving Social Security, the lower of the two benefits will go away upon the first death. If the deceased spouse was receiving a pension or annuity, the payment may stop at death – it depends what payout type was selected when payments began. With regards to retirement accounts such as IRAs, 401(k)’s and 403(b)’s, the surviving spouse will likely be the beneficiary of the deceased’s accounts. Therefore, there presumably will not be much of a drop, if any, in income from such accounts.

There are a lot of moving parts and everyone’s situation will be unique. Nonetheless, there is a likelihood the surviving spouse’s income may decrease more than his or her expenses.

Unfortunately, the surviving spouse’s taxes may go up, too. This is called the widow or widower tax penalty.

Dollar-for-dollar, single persons pay higher taxes than married persons. This is due to single tax filers having smaller standard deductions and smaller income tax brackets as compared to married tax filers.

There are also other retirement-specific taxes, such as Medicare premium surcharges, that impact single persons more than married persons.

What can you do to prevent or minimize the widow or widower tax penalty???

The first step is to be aware of its existence.

Next, make sure you account for it in your retirement plan. Death is unfortunately inevitable. Chances are you and your spouse will not die at the same time. Therefore, one of you will potentially be subject to the widow or widower tax penalty.

Finally, some proactive tax planning can help eliminate or reduce its effects.

For more information, watch my recent YouTube video, What is the Widow and Widower Tax Penalty?