Losing a spouse is emotionally devastating — and for many widows and widowers, it can also bring unexpected financial hardship.
One key reason is the “widow’s tax penalty,” a little-known tax consequence that can increase your tax burden and reduce income after a spouse’s death.
Here’s how this penalty can significantly impact your retirement finances.
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What is the ‘widow’s tax penalty’?
The widow’s tax penalty refers to the potential increase in tax liability that occurs when a surviving spouse’s filing status changes after their partner’s death.
In the year your spouse dies, you can still file jointly. The following year, you may qualify as a Qualifying Surviving Spouse — but only if you have a dependent child and meet other criteria. If not, and especially if you’re an empty-nester, you’ll have to file as single or head of household. (1)
This change can significantly impact your taxes: you may face a lower standard deduction, a higher marginal tax rate, more of your Social Security benefits taxed, and potentially trigger Medicare Income-Related Monthly Adjustment Amount (IRMAA) surcharges.
In short, you could end up with less income and a higher tax bill — a financial blow on top of an emotional one.
Take a retired couple with $120,000 in annual income. Filing jointly, their effective tax rate might be around 16.3%. After one spouse passes, the survivor may still need about $100,000 to maintain their lifestyle — but now must file as single.
As a result, their effective tax rate could rise to 21.5% or more.
In this case, the survivor faces both a drop in income and a higher tax rate — simply due to the change in filing status.
Read more: How much cash do you plan to keep on hand after you retire? Here are 3 of the biggest reasons you’ll need a substantial stash of savings in retirement
How to minimize the fallout
Short of remarrying, there’s no way to fully avoid the widow’s tax penalty. However, there are ways to mitigate its financial impact.
The most effective strategy is to plan ahead. When creating your retirement plan, include scenarios where one spouse passes first. Consider how that would affect income needs, tax brackets, and filing status. This allows you to stress-test your retirement plans for survivorship risk.
Work with a financial planner or tax advisor to ensure both spouses are prepared.
Here are some ways to reduce the tax burden for the surviving spouse:
Roth conversions: Converting traditional IRA assets to Roth IRAs while filing jointly can lock in today’s lower tax rates and reduce future Required Minimum Distributions (RMDs).
Delay Social Security: Waiting to claim benefits can increase the survivor benefit, ultimately providing more income to help offset the higher tax burden.
Strategic timing of large financial moves: If you’re planning to sell property or realize large capital gains, consider doing so in the same year your spouse passes, while you’re still eligible for joint filing. That can reduce your exposure to capital gains taxes.
The widow’s penalty is one of the most overlooked risks in retirement planning — likely because planning for death is uncomfortable. But just like estate planning, preparing for this scenario case ease the financial burden on your loved ones and provide greater peace of mind.
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This article provides information only and should not be construed as advice. It is provided without warranty of any kind.