The Widow's Penalty and Taxes

Losing a loved one is hard enough without having to deal with the financial aftermath. When a spouse passes away, their partner may encounter unexpected money and tax burdens that can potentially spiral out of control. The added obligation is sometimes called “the widow’s penalty.”

Depending on the state’s tax laws, surviving spouses may contend with an overall reduction in income. That can come on top of rising Medicare expenses and higher tax liability, even after the partner’s death.

However, with deliberate and careful tax planning, survivors can help lessen or relieve some of the excessive expenses in the widow’s penalty.

Tax Implications of the Widow’s Penalty

The lifestyle change arising from a spouse’s death is significant. Healthcare, personal expenses, transportation, and financial management can all become more expensive. Taxes, however, can skyrocket unexpectedly. Here are some reasons why.

Changes in Income and Tax Rates

Many married couples file their tax returns jointly. When one of them dies, the survivor must file taxes as a lone individual, eliminating the benefits of a joint return. They may also find the tax percentage on already-reduced income increasing as well.

The Tax Cuts and Job Act (TCJA) also mandated a steep drop in a couple’s standard deductions. When both partners are still alive, the standard deduction for joint filers is $29,200. But when one spouse dies, the standard deduction plummets to $14,600 for single filers.

Medicare Income Related Monthly Adjustment Amount (IRMAA)

The IRMAA is an additional surcharge tacked on to the monthly Medicare premium in Part B and Part D plans. It’s predicated on the income and filing status from the two previous years. This is common with high-net-worth families. The resultant widow’s penalty makes these premiums more expensive.

Net Invested Income

Married couples who file jointly have a minimum threshold on investment income taxes. As long as their income from investments stays below $250,000, they avoid all tax liabilities on their portfolios. When income from their holdings exceeds that minimum, the couple is charged 3.8% of their holdings as a tax on net invested income.

After a spouse dies, however, that minimum drops to $200,000 if the survivor files taxes singly. They may also be moved into a minimum 32% tax bracket based on their revised income.

Ways to Minimize the Widow’s Penalty

For many families, the main vessel for generating post-death income is a large IRA that has annual required minimum distributions (RMDs) beginning April 1st after your 73rd birthday (under the SECURE 2.0 Act, that RMD age will rise to 75 in 2033). With careful tax planning, survivors can reduce the IRA’s balance to generate less taxable income.

The best way to mitigate the effects of the widow’s penalty is for couples to actively manage their IRA while both partners are still alive. They may make higher after-tax contributions to their funds and convert to a Roth IRA, in which distributions are not taxed after withdrawal.

After death, the survivor has one last chance to take advantage of the joint filing status. This can reduce their tax impact immediately following their partner’s death. Couples in higher tax brackets may also think about making more charitable contributions. By donating the equivalent of their annual RMD amount to charity, the survivor may deduct the amount when filing taxes.

Start Planning Immediately

The TCJA is set to expire at the end of 2025, and no one is certain what could happen to specific tax brackets. They may revert to pre-TCJA brackets, which would reestablish higher minimum tax rates that were considerably higher. In any event, the time to start preparing for the widow’s penalty is now—before those measures may have an effect.

Get Help With the Widow’s Penalty

At Infiniti Wealth Management, I help clients navigate the deep waters of financial and tax responsibilities, including the widow’s penalty. You can find out more by contacting me at 845-278-8638 or sending us a message to set up a complimentary consultation.