Plan for a Bigger Tax Bite When Spouse Dies
The change in tax-filing status from married to single can easily hike the tax tab of the surviving spouse.
It's tough enough when a spouse dies. But at tax time, the survivor should prepare for another blow: a bigger tax tab, known as the widow's (or widower's) penalty.
When a spouse dies, the survivor's income could drop somewhat. But the tax-bracket thresholds for single filers are low relative to thresholds for joint filers. "A single person goes into the tax brackets faster" than joint filers, says Martin James, a certified public accountant in Mooresville, Ind. "All of a sudden, it's easy to get an increase" in taxes.
James recalls an older couple he advised. For 2012, the year the husband died, the widow was able to file a joint return. The couple's adjusted gross income was $91,000 and their taxable income was $66,000, which fell within the 15% tax bracket for joint filers ($17,400 to $70,700 in 2012). Her federal tax tab: $8,884. (AGI is total income less a few adjustments, while taxable income is AGI less personal exemptions and deductions.)
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
In 2013, the wife's AGI dropped to $88,000. But her taxable income rose to $69,000, as a result of losing one personal exemption and of lower medical deductions. Her taxable income bumped her into the 25% tax bracket for single filers ($36,250 to $87,850). Her federal tax bill: $13,365. "If she was still married," James says, "they would have been at the top of the 15% bracket." That bracket topped out at $72,500 in 2013.
As a single person, the widow would likely be required to pay income-related surcharges for Medicare Part B and Part D for the first time -- about $640. (The trigger point for married couples is twice as high, AGI of $170,000 versus $85,000 for singles.)
For older retired couples, James says, "income doesn't change a whole lot" -- leaving many survivors in a higher bracket. Investment income is likely to remain level, for example.
Major expenses may not drop either, says Cindy Hounsell, president of the Women's Institute for a Secure Retirement. "She still has the house," Hounsell says, with its property taxes and maintenance costs.
The Tax Hit on Benefits
James says the widow's penalty has the most impact on retired taxpayers with modest incomes. After a spouse's death, he says, there's a greater likelihood that a higher percentage of the survivor's Social Security benefits will be subject to tax.
Consider a couple in the 15% tax bracket with $40,000 of AGI, not including $18,000 in Social Security benefits. Fifty-seven percent of their benefits would be subject to federal income tax -- for a tax bite of $1,538. After the husband dies, his wife's AGI drops to $35,000 and her benefit drops to $12,000. At that point, 85% of her benefit will be taxed -- for a tax tab of $1,530.
Higher-income survivors can get hit, too. The top 39.6% tax rate, for example, kicks in at $450,000 of taxable income for couples and $400,000 for singles.
There are steps couples can take to keep a survivor from jumping into higher brackets. "The biggest thing is to look at this while both spouses are living," says Jeffrey Levine, IRA technical consultant with Ed Slott & Co. "It should be part of an overall plan."
One strategy is to convert part of your traditional IRA to a Roth. If you're a couple in the 25% tax bracket, you can convert enough to take you to the top of the bracket over several years -- so your tax tab on each conversion won't exceed 25%. After one spouse dies, withdrawals from the traditional IRA "can be partially offset by tax-free income from the Roth and keep the spouse at 25%," Levine says.
Buying life insurance while you're still healthy is another strategy, James says. The proceeds could provide tax-free income to the survivor. Or he or she can use the money to pay the taxes on future Roth conversions or on the bigger tax bill if the survivor gets bumped to a higher bracket, he says.
-
Use An iPhone? You May Be Hearing From A Class-Action Lawsuit Group
A handful of suits against the iPhone maker seek to crack down on everything from app store purchases to messaging.
By Keerthi Vedantam Published
-
Capital One/Discover: What's In Their Wallet For You?
Push back on Capital One's planned merger with Discover is growing with one group of consumer advocates calling for a public hearing.
By Keerthi Vedantam Published
-
403(b) Contribution Limits for 2024
retirement plans Teachers and nonprofit workers can contribute more to a 403(b) retirement plan in 2024 than they could in 2023.
By Jackie Stewart Published
-
SEP IRA Contribution Limits for 2024
SEP IRA A good option for small business owners, SEP IRAs allow individual annual contributions of as much as $69,000 a year.
By Jackie Stewart Published
-
Roth IRA Contribution Limits for 2024
Roth IRAs Roth IRA contribution limits have gone up for 2024. Here's what you need to know.
By Jackie Stewart Published
-
SIMPLE IRA Contribution Limits for 2024
simple IRA The maximum amount workers at small businesses can contribute to a SIMPLE IRA increased by $500 for 2024.
By Jackie Stewart Published
-
457 Contribution Limits for 2024
retirement plans State and local government workers can contribute more to their 457 plans in 2024 than in 2023.
By Jackie Stewart Published
-
Roth 401(k) Contribution Limits for 2024
retirement plans The Roth 401(k) contribution limit for 2024 is increasing, and workers who are 50 and older can save even more.
By Jackie Stewart Published
-
7 Things Medicare Doesn’t Cover
Healthy Living on a Budget Medicare Part A and Part B leave some pretty significant gaps in your health-care coverage. But Medicare Advantage has problems, too.
By Donna LeValley Last updated
-
Is a Medicare Advantage Plan Right for You?
Medicare Advantage plans can provide additional benefits beneficiaries can't get through original Medicare for no or a low monthly premium. But there are downsides to this insurance too.
By Jackie Stewart Published