In the hierarchy of stressful life events, losing a spouse ranks as the most traumatic crisis most individuals will ever experience. For that reason, financial advisers often recommend that surviving spouses postpone making major financial decisions until they’ve had time to process the loss.
For the most part, that’s good advice. However, surviving spouses who want to avoid an unfortunate phenomenon known as the widow’s (or widower’s) penalty may need to take steps relatively quickly to avoid a significantly higher tax bill.
The penalty occurs when a surviving spouse’s tax status reverts from married filing jointly to single. If you’re a widow or widower, you can file a joint tax return for the year of your spouse’s death. But after that, you’ll be required to file as a single taxpayer unless you have dependent children (surviving spouses with dependent children are eligible for joint filing for up to two years after the death of the first spouse).
In many cases, switching to single filing status could result in a higher tax bill, even if your income remains the same—or even if it declines because of changes in your Social Security and pension benefits after your spouse dies. The tax hit can be particularly severe if you’re required to take minimum distributions from an individual retirement account (IRA), because you could end up paying higher tax rates on the same amount of income you received while your spouse was alive.
For example, in 2024, a married couple who file jointly with up to $383,900 in taxable income qualify for the 24 percent tax bracket, but a single filer with the same amount of taxable income will jump into the 35 percent tax bracket. “The tax scenario in our country assumes a single person makes half of what a married couple makes, but it’s not that way in real life,” says Ed Slott, founder of IRAhelp.com.
As a surviving spouse, you have the option of rolling your deceased spouse’s IRA into your own IRA, which will postpone required minimum distributions if you’re younger than 73. Eventually, though, you’ll have to take required minimum distributions (RMDs) from the combined account and pay taxes on the withdrawals. In addition to shifting you into a higher tax bracket, those distributions could trigger a high-income surcharge on your Medicare Part B and Part D premiums.
The most effective way to mitigate the widow’s penalty is to take advantage of your joint filing status in the year of your spouse’s death. Slott recommends using that window to convert as much of your traditional IRA as possible to a Roth. You’ll pay taxes on the conversion but at a lower rate than you’ll pay as a single filer, he says. More significantly, withdrawals from a Roth are tax-free as long as you’re 59½ or older and have owned a Roth for at least five years, and you won’t be subject to RMDs.
A large conversion could trigger the Medicare high-income surcharge, which is based on your modified adjusted gross income from two years prior to the current year; the 2024 surcharge, for example, is based on your 2022 MAGI. However, that will be a one-time hit to your Medicare premiums, notes Slott, because future withdrawals from a Roth won’t affect the surcharge. “It’s one year versus the rest of your life,” he says.
