What is the Widow's Tax Penalty?

While the loss of a spouse if terribly upsetting, there are a number of action items the surviving spouse will need to address. Unfortunately, the IRS does not give us an extension to make changes to our investment and tax planning to avoid future tax “penalties”.

The "penalty" is when the surviving spouse pays more tax on less income after the death of their partner. This occurs when the surviving spouse begins filing as a single filer the year after the death of their spouse. 

Following the death of the first spouse, the surviving spouse will likely experience a reduction in income as they lose the income associated with their deceased partner: employment income, social security benefits (the lower of two benefits), and certain pensions and annuities.

Despite the reduction in income, the surviving spouse may also find themselves subject to higher taxes. For those with no qualifying dependents, the surviving spouse must begin filing as a single filer the year following their partner's passing. This means that in 2023, the surviving spouse will hit the 22% bracket at $44,726 in taxable ordinary income rather than the $89,451 threshold they may have been familiar with while filing jointly. The condensed single filer tax brackets subjects more income to higher tax rates, even if the surviving spouse's income decreases.

In addition to higher taxes, the surviving spouse may also incur higher Medicare premium surcharges. Similar to the condensed single filer tax bracket, the single filer Medicare Modified Adjusted Gross Income thresholds are also more condensed. Where premium surcharges would not normally be assessed until Medicare MAGI reaches $194,001 for joint filers, the surviving spouse would now be subject to an increase at $97,001 in MAGI. 

Although there is no strategy to avoid the Widow's Tax Penalty (aside from remarrying), the surviving spouse may be able to take advantage of their final year filing jointly to distribute more income at a lower tax rate.

With only a few months left in the year, time is running out to model and execute any tax strategies as a new widow/er. If you or someone you know could benefit from a discussion, please let us know.