A Sudden Change in IncomeThe 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.
The Tax Status ChangesAt 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.
The Widow’s PenaltyThese 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.
Remarriage May Need to WaitAdvance 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 StatusThe 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.
Tips to Prepare for the Possible Widow’s PenaltyHere 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.
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.