How to Prepare for the Widow’s Penalty Before It’s Too Late

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When your spouse dies, it likely will be a traumatic experience. Although it is inevitable, the pain and changes it brings to the surviving spouse are going to be considerable. At the same time, drastic changes in income and taxes called the widow’s penalty will occur, and you need to know how to prepare for it.

A Sudden Change in Income

The severity of the change in income depends on several factors, including age, whether or not both spouses were drawing Social Security and other retirement income, are part of it. If both spouses were drawing Social Security, there would be the immediate loss of at least one-third of your income from this source. Once the Social Security Administration (SSA) is notified of the death, payments will automatically be switched to the larger amount, and the smaller one will be dropped.

If you are not yet 65, but your spouse was drawing Social Security benefits, you can get their benefits, but it will be reduced according to your age. The AARP says that after you turn 60, you can get benefits between 71.5–99 percent. You can get the full amount of your spouse’s benefits after you reach full retirement age—but you must wait.

The Tax Status Changes

At the same time, the tax status of the surviving widow or widower changes. They lose the advantage of being able to file under the married filing jointly status and must file as single. It can cause more problems because singles pay a higher tax rate than those who file married filing jointly.

For example, in 2023, the second tax bracket for married filing jointly ranges from $22,001 to $89,450. Taxes on that income range are 12 percent. The second tax bracket for singles goes from $11,001 to $44,725, and people earning in that range also pay 12 percent, but the next tax bracket for singles goes from $44,726 to $95,375, and they pay 22 percent on their income. It reveals that singles earning more than $44,725 will pay considerably more taxes than married people.

The Widow’s Penalty

These two changes—the sudden loss of income and the higher tax rate—are referred to as the widow’s penalty. It means that surviving spouses may suddenly find themselves in a financial bind that can be difficult to handle.

Depending on the age of the spouse and how mobile they are, some expenses could be reduced, such as groceries, car insurance, and possibly gas. If you are paying for a second car, you could sell one and have one less monthly payment.

The loss of a spouse could also mean that costs may increase. It can occur if the surviving spouse must rely on outside help for things the other spouse did while still alive. It may include house-cleaning and food delivery services, taking care of the yard and garden, etc.

If you earn a higher income, your spouse may also face higher Medicare costs—the medicare income-related monthly adjustment amount (IRMAA) surcharges. The surviving spouse could be placed into a higher tax bracket if they must start withdrawing required minimum distributions (RMDs) from retirement accounts. The additional income could put them into a higher income tax bracket, reducing their income even more and possibly changing their standard of living.

Remarriage May Need to Wait

Advance financial preparations can be made to reduce the tax impact, but the newly single spouse needs to understand that remarriage may need to be delayed. NerdWallet says that in the year of the spouse’s death, the surviving spouse can still use the married filing jointly tax status for that whole year, but only if they do not remarry in the same year.

Your Filing Status

The Internal Revenue Service enables people to file under different tax statuses, depending on your situation. WingsforWidows mentions that if you meet the conditions for more than one, you can choose the one that gives the biggest tax refund—or lets you pay the least taxes. It will require you to fill out the tax forms for both statuses to determine the better one.

If you remarry within the same year as your spouse’s death, you need to file two tax forms. You would file one with your new spouse either as a married filing jointly status, or as married filing separately. At the same time, you would file taxes with your former spouse as married filing separately.

Tips to Prepare for the Possible Widow’s Penalty

Here are three ways to prepare the surviving spouse for the widow’s penalty:

1) Convert retirement funds to Roth accounts.

One way to prepare for the widow’s penalty, if you have retirement accounts such as 401(k)s or individual retirement accounts (IRAs), is to make a conversion. Convert some of the money to a Roth 401(k) or a Roth IRA. Roth accounts do not have required minimum withdrawals within the owner’s lifetime.

When you make a conversion, you will pay taxes on the money, but Forbes says that it will cost less if you pay taxes at the married filing jointly tax rate. You also want to spread the conversions over several years instead of all at once to avoid a huge tax bill. Once you make the conversion, you can withdraw the money without taxes and get larger withdrawals.

2) Get life insurance.

A life insurance policy can provide enough money to make up the difference and enable the surviving spouse to survive the widow’s penalty. Life insurance proceeds are usually not taxed as long as the surviving spouse is the named beneficiary.

3) Get maximum Social Security benefits.

For those who have not yet started getting Social Security benefits, you could ensure that your spouse receives more benefits if you wait to start drawing when you reach full retirement age. It increases by 8 percent annually until you are 70—when it maxes out.

Taxes and the widow’s penalty can be confusing after the death of a spouse. Get tax help immediately from a tax advisor or estate planner to ensure you understand the ramifications and get the benefits quickly.

The Epoch Times copyright © 2023. The views and opinions expressed are those of the authors. They are meant for general informational purposes only and should not be construed or interpreted as a recommendation or solicitation. The Epoch Times does not provide investment, tax, legal, financial planning, estate planning, or any other personal finance advice. The Epoch Times holds no liability for the accuracy or timeliness of the information provided.