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Planning for the 'Widow’s Tax Penalty'

S.J. Steinhardt
Published Date:
Nov 7, 2023

iStock-512084639 Wife Widow Death Funeral Mourning

It's important to be aware of the so-called widow’s penalty and to take advantage of strategies to reduce or avoid it, a retirement planning consultant advised in Kiplinger Consumer News Service.

“The widow’s penalty occurs when a person’s tax filing status goes from married filing jointly to single,” wrote Joe Schmitz Jr., founder and CEO of Peak Retirement Planning Inc., in the article. “This change can cause the surviving spouse to have to pay nearly double the taxes compared to what they were paying.”

In an example that he provided, one couple had been filing their taxes jointly, each received Social Security, and both were older than 73, meaning that they were forced to take required minimum distributions (RMDs) from the money they had saved in Individual Retirement Arrangments (IRAs) over all their working years. After the husband passes away, one of the Social Security incomes stops, and only the higher of the two Social Security incomes remains. So the surviving spouse suffers a loss of income from what she was used to. In addition, the surviving spouse’s tax status goes from married filing jointly to single. That could result in the surviving spouse having to pay nearly double the amount of taxes.

Two factors “fuel the fire” for the widow’s penalty, Schmitz wrote. One is that the standard deduction gets cut in half, meaning that surviving spouse will be left with less tax-free income. The other is that tax brackets can be smaller. For example, he wrote, if someone has $85,000 of taxable income and is married filing jointly, that person is in the 12 percent tax bracket, but if someone is single with $85,000 of taxable income, that person will be in the 22 percent tax bracket.

To plan for such a situation, Schmitz advised using the married filing jointly tax brackets while possible in preparation for one spouse passing away first.

He also suggested paying taxes on tax-deferred vehicles such as IRAs and 401(k)s while taxes are low and the couple is still in the more generous married, filing jointly tax brackets; optimizing Social Security income to ensure that the surviving spouse will be left with the highest benefit; and drawing larger required minimum distributions (RMDs) to leave the surviving spouse with less taxable income.

“Unfortunately, you can change only what you can control,” Schmitz wrote in conclusion. “We cannot control the tax code or laws, but we can control how we plan for it. So, let’s get planning now and make sure our loved ones can continue on with the plan they deserve.”

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