Avoid the Survivor’s Tax Penalty After the Death of a Spouse
When one spouse passes away, the surviving partner often assumes their financial obligations will decrease. However, many widows and widowers face a surprising increase in their tax burden. Known as the “survivor’s penalty,” this issue affects individuals who transition from joint filing to single status, often while still receiving the same or similar income. There are some tips to avoid the survivor’s tax penalty after the death of a spouse.
As a result, survivors may end up in a higher tax bracket, lose key deductions and pay more on Social Security or investment income. If you or a loved one is navigating life after a spouse’s death, proactive tax and estate planning can help reduce this burden and preserve your financial stability.
What Is the Survivor’s Penalty?
The survivor’s penalty refers to the increased income taxes surviving spouses may face after switching from “married filing jointly” to “single” or “qualifying widow(er).” This change impacts:
- Income tax brackets, which become narrower for single filers
- Standard deductions, which are cut nearly in half
- Taxation of Social Security benefits, which may be higher if income remains steady
- Medicare premiums, which increase with higher taxable income
This situation is prevalent among retirees who rely on Social Security, pensions, or retirement accounts for their income. A surviving spouse may lose only a portion of the household income but still be taxed as a single person, resulting in a higher effective tax rate.
Real-World Impact on Retirees
Consider a couple filing jointly who has a combined income of $90,000. Their federal tax liability may be relatively modest thanks to the wider joint tax brackets and higher standard deduction.
However, if one spouse dies and the survivor continues to receive $70,000 in income, including retirement accounts and survivor benefits, they may be subject to a higher tax bracket. That income could also cause more of their Social Security benefits to become taxable and raise their Medicare Part B premiums.
These hidden costs can take a significant toll on a surviving spouse, especially during an emotionally and financially vulnerable time.
How a Probate Attorney Can Help You Plan Ahead
The best way to avoid the survivor’s penalty is to anticipate it while both spouses are still living. With the help of a probate or elder law attorney and financial advisor, couples can build tax-efficient strategies that reduce exposure.
Some options include:
- Roth conversions: Paying taxes on retirement accounts now to reduce taxable income later
- Adjusting Social Security claiming strategies: Coordinating timing to maximize survivor benefits
- Splitting income-producing assets: Using trusts to distribute income more evenly across heirs or generations
- Using the step-up in basis: Taking advantage of tax resets on inherited assets to reduce capital gains
It’s also important to ensure that estate planning documents reflect your current wishes. A surviving spouse who is suddenly left in charge of financial and medical decisions needs clear legal authority through powers of attorney, healthcare proxies and updated wills or trusts.
What to Do after a Spouse’s Death
If you are already a surviving spouse, it’s not too late to act. In the year of a spouse’s death, the surviving partner can still file a joint return. After that, unless they have a qualifying dependent, they must file as single.
Working with a probate attorney can help avoid the survivor’s tax penalty after the death of a spouse. They will help sort through estate settlements, beneficiary changes and tax filings. A CPA or financial planner can also assess how the change in filing status impacts required minimum distributions (RMDs), Medicare and taxes. If you would like to learn more about tax planning after the death of a loved one, please visit our previous posts.
Reference: CNBC (November 6, 2024) “You could face the ‘survivor’s penalty’ after a spouse dies — here’s how to avoid it”
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