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Wealth & Well-Being

Taxes in Retirement: What Happens If Your Spouse Passes Away?

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You’ve spent years devising a tax-savvy retirement plan that will prolong the longevity of your wealth and ensure you don’t outlive your assets. But do you know what would happen to your taxes in retirement should your spouse suddenly pass away?

A Widow’s Loss of Income

When a woman becomes a widow, she will typically experience some decrease in income. The decrease can be modest, especially for a couple living primarily off a significant amount of accumulated assets. However, at a minimum one of two Social Security benefits will be lost.

When your spouse passes, Social Security provides a one-time $255 death benefit. It will also terminate your spouse’s benefit, beginning with the month of death. If your spouse already received his or her payment in the month of their death, those funds would have to be returned. If you were also collecting Social Security and your benefit was lower, in most cases it will be increased to match your spouse’s benefit. However, this still incurs the loss of your own benefit amount, resulting in a lowered income.

Of course, a modest loss of income may be relatively easy to adapt to. But coupling a loss of income with a higher tax liability is another story. Generally speaking, your marginal tax rate will probably go up when filing as a single person and you will lose some of the deductions available to those married filing jointly.

An Increase in the Marginal Tax Rate

Income tax rates are determined by both taxable income and filing status. Married couples filing jointly can earn more income before being pushed into a higher tax bracket. For example, married couples filing jointly for the tax year 2021 can earn up to $418,850

before moving from the 32% to 35% tax bracket. But single filers can only earn up to $209,425.[i]

So, if your loss of income is marginal, it’s likely you’ll be bumped into a higher tax bracket as a single filer.

Losing Half the Standard Deduction

In the year following your spouse’s death, you will only have half the standard deduction that you enjoyed as a couple, and various deductions and credits will phase out that previously applied at your “lower” income level as a couple.

Again, this all becomes problematic because the surviving spouse is left with all of the income—but with half the standard deduction and half as much room in her new tax bracket available to offset the tax burden.

Consider Shifting Income Forward

Any predictions involving mortality are both uncomfortable and tricky as none of us want to imagine the emotional impact of losing a spouse, let alone the financial impacts. This is in addition to the obvious hurdle which is calculating your spouse’s lifespan. There truly is no way to foresee how many years you’ll file as married or single in retirement.

While it is impossible to make these types of predictions, it is not unreasonable to expect that there will be some years during which only one of you is still living and that the surviving spouse will have to contend with a higher tax rate at that time.

Many couples find it beneficial to shift income forward—into the lower tax rate years—in order to prepare for this eventuality. This can be accomplished with Roth conversion or by prioritizing pending in tax-deferred accounts. Often the strategy is to pick a particular threshold to work with, such as performing a Roth conversion at the point just before (1) Social Security becomes taxable, (2) Medicare Income-Related Monthly Adjustment Amount (IRMAA) begins, (3) Required Minimum Distributions from your IRA’s, or (4) you hit the top of a particular tax bracket.

Strategize Early and Often

The death of a spouse is one of life’s most devastating experiences. The last thing you might want to think about is how becoming a widow will affect your taxes. But, understanding how your marital status affects your income tax rate can help eliminate the surprise of a hefty tax burden right after the loss of your spouse.

At Northstar Financial Planning, we recognize it can be difficult to plan for something as devastating as the loss of a spouse, but we also know that preparing yourself financially for this reality can eliminate some of the stress of this transition. As Certified Financial Transitionists®, we help our clients work this reality into their comprehensive financial plan to be as prepared as one can be for the unexpected. We hope you’ll contact us today to discuss these and other retirement planning considerations worth exploring.

[i] https://www.forbes.com/advisor/taxes/taxes-federal-income-tax-bracket/ 19 July 2021

Written by Robin Young in collaboration with Lexicon Content Development

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