YOUR BUSINESS AUTHORITY
Springfield, MO
YOUR BUSINESS AUTHORITY
Springfield, MO
The passing of a spouse is one of life’s most profound challenges. Beyond the emotional weight, it often brings unforeseen financial consequences. One issue that frequently surprises retirees is the “survivor’s penalty” – a tax change that can lead to higher tax bills for the surviving spouse. Fortunately, proactive financial planning can help soften the impact and provide clarity during a difficult time.
What is the survivor’s penalty?
The survivor’s penalty stems from a shift in tax filing status after the loss of a spouse. In the year of a spouse’s passing, the surviving partner can still file as “married filing jointly.” However, in subsequent years, the tax status usually changes to “single.”
This change shrinks the tax brackets for each tax rate. Also, the standard deduction is smaller. In 2024, married couples filing jointly enjoy a standard deduction of $27,700. The 12% tax bracket covers income up to $89,450. In contrast, single filers have a standard deduction of $13,850. The 12% tax bracket ends at $44,725.
This narrower tax structure creates the potential for higher effective tax rates, even if the surviving spouse’s income remains the same.
How to prepare and minimize the penalty
With proactive planning, couples can take steps to protect the surviving spouse from an increased tax burden. Let’s look at two strategies.
You can start with a long-term tax projection. This estimates how your income and deductions might change when one spouse passes. By visualizing this scenario, you can anticipate potential tax challenges and implement tailored strategies to reduce the future burden.
Next, you can proactively utilize lower tax brackets. For many retirees, early retirement years – before required minimum distributions or full Social Security benefits begin – offer a window of lower taxable income.
During this time, it is wise to accomplish a few things.
You should strategically withdraw from pre-tax accounts. Withdrawals during this period can “fill up” lower tax brackets, smoothing income over time and reducing future tax liabilities. You can also convert pre-tax savings to Roth IRAs. Roth conversions in lower-income years can reduce taxable income later, potentially easing the tax burden when the surviving spouse files as “single.”
Each strategy allows couples to fully utilize the “married filing jointly” tax brackets but requires careful execution. Missteps, such as triggering higher Medicare premiums or additional taxes on Social Security benefits, can offset the benefits. It’s critical to plan withdrawals and conversions with a qualified professional who understands your unique financial picture.
The strategic takeaway
The survivor’s penalty is a harsh and unfortunate reality for many retirees. It does not have to derail your financial plan. With the right strategies, couples can reduce the strain (and tax burden) that comes with this inevitable change. Proactive planning today can mean peace of mind tomorrow.
Myles Jackson is a wealth management adviser at SignalPoint Asset Management LLC in Springfield. He can be reached at mjackson@signalpointinvest.com.
LeDoux’s Furniture and Whatnots opened on Commercial Street; Soapbox Studios LLC launched; and Day One Fitness LLC opened its first location.
This article is slightly misleading.
Per the IRS, a surviving spouse can claim the Qualifying Surviving Spouse filing status for two the next two years, following the death of their spouse.
In reference to the increased tax burden, the example provided is technically correct, but it fails to recognize that the tax brackets mentioned, are exactly half of what they were, when they were married. This also applies to the Standard Deduction.
Once you get into the higher tax brackets, yes, they do change, but you have to make an awful lot to get that high to notice it. However, there would be an increased burden on the surviving spouse via monthly bills and living expenses, which is outside the scope of this article.