Women and Wealth: May 2023

Dear Friends,

If you’re a married woman, it’s important to consider the fact that 80% of wives will outlive their spouses, which means wives need to plan for the possibility of being widowed. Unfortunately, the tax code is not favorable to widows, and it’s important to educate yourself about the many tax traps widows face.

1. When a spouse dies, the surviving spouse is no longer taxed as “joint” and is instead taxed as “single.” This can push the widow into a higher tax bracket, forcing her to pay more in taxes and receive less money than she expects. It’s important to be aware of the five main tax pitfalls that widows need to be aware of. For example, a married couple with $250,000 of taxable income files in the 24% tax bracket. A widow filing “Single” with the same income is now bumped to the 35% tax bracket.

2. Filing your tax return won’t be the same. The standard deduction that a widow is entitled to will fall significantly, from a married-filing-joint $24,400 standard deduction to a single $12,200 standard deduction. This means losing over 50% of the standard deduction alone will hurt a newly widowed person, but it gets worse from there. Losing the standard deduction means you are unlikely to benefit from deductions unless there are substantial medical expenses or charitable contributions.

3. Social Security can be a blessing, but watch out for the tax liability. Up to 85% of Social Security benefits will likely be taxed for most widows, depending on their income levels. This is because widows are taxed as “single” rather than “married filing jointly” after the first year, which can lead to a drastic increase in taxable Social Security income alone.

4. Remember the Medicare and IRMAA charges. The widow’s penalty doesn’t just affect income taxes, it also applies to Medicare surcharges. Surcharges from the Income-Related Monthly Adjustment Amount (or IRMAA), can hinder widows. IRMAA is a higher premium charged by Medicare Part B and Medicare Part D to individuals with incomes that exceed $85,000 (for single). Even one additional dollar in income can trigger thousands of dollars of additional Medicare premiums, aka taxes. Be wary!

5. Watch out for lump sums. The problem of the widow’s penalty is further compounded if your spouse had some type of pension or other retirement plan paying a lump sum. For larger amounts, a lump sum payment might bring the widow into an even higher tax bracket, but an immediate lump sum might allow her to keep more of the payment than if she chose monthly payments, and was forced to be taxed as a single filer if the payments were spread over several years.

There are many pitfalls that can and will surprise widows. While the transition from single to joint filer is often anticipated and expected, the transition from joint to single filer is significantly less so. To be more prepared for the future, consider exploring how these issues will be dealt with in the event of a spouse’s death. It’s important to work with us to educate yourself about the many tax traps widows face so that there are no surprises in the fight against Uncle Sam.
Please reach out to us if you have any questions.



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