How to prepare for the ‘survivor’s penalty’ before a spouse passes

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Many older women outlive their spouses and may not expect higher future taxes after suffering from the loss. But there are ways to prepare, according to financial experts. 

American women have a significantly higher life expectancy than men, according to data from the Centers for Disease Control and Prevention. In 2021, life expectancy at birth was 73.5 years for males compared to 79.3 years for females. 

As a result, many married women eventually face a “survivor’s penalty,” resulting in higher future taxes, according to certified financial planner Edward Jastrem, chief planning officer at Heritage Financial Services in Westwood, Massachusetts.

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Taxes can be ‘the biggest shock’ for widows

The year a spouse dies, the survivor can file taxes jointly with their deceased spouse, known as “married filing jointly,” unless they remarry before the end of the tax year.

After that, many older survivors file taxes alone with the “single” filing status, which may include higher marginal tax rates, due to a smaller standard deduction and tax brackets, depending on their situation.

For 2023, the standard deduction for married couples is $27,700, whereas single filers can only claim $13,850. (Rates use “taxable income,” which is calculated by subtracting the greater of the standard or itemized deductions from your adjusted gross income.)

Higher taxes can be “the biggest shock” for widows — and it may be even worse once individual tax provisions sunset from former president Donald Trump’s signature legislation, explained George Gagliardi, a CFP and founder of Coromandel Wealth Management in Lexington, Massachusetts.

Before 2018, the individual brackets were 10%, 15%, 25%, 28%, 33%, 35% and 39.6%. But through 2025, five of these brackets are lower, at 10%, 12%, 22%, 24%, 32%, 35% and 37%.

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Typically, the surviving spouse inherits the deceased spouse’s individual retirement accounts and so-called required minimum distributions are about the same. But the surviving spouse now faces higher tax brackets, Gagliardi explained.

“The larger the IRAs, the bigger the tax problem,” he said.

Consider partial Roth conversions

Some surviving spouses may face higher future taxes, but it’s important to run tax projections before making changes to the financial plan, experts say.

Spouses may consider partial Roth IRA conversions, which transfers part of pretax or non-deductible IRA funds to a Roth IRA for future tax-free growth, Jastrem explained.

This is often best done over a number of years to minimize the overall taxes paid for the Roth conversions.

George Gagliardi

Founder of Coromandel Wealth Management

The couple will owe upfront taxes on the converted amount but may save money with more favorable tax rates. “This is often best done over a number of years to minimize the overall taxes paid for the Roth conversions,” Gagliardi said.

Review investment accounts

It’s always important to keep account ownership and beneficiaries updated, and failing to plan could be costly for the surviving spouse, Jastrem said.

Typically, investors incur capital gains based on the difference between an asset’s sales price and “basis” or original cost. But when a spouse inherits assets, they receive what’s known as a “step-up in basis,” meaning the asset’s value on the date of death becomes the new basis.

A missed step-up opportunity could mean higher capital gains taxes for the survivor.

Edward Jastrem

Chief planning officer at Heritage Financial Services

That’s why it’s important to know which spouse owns each asset, especially investments that may be “highly appreciated,” Jastrem said. “A missed step-up opportunity could mean higher capital gains taxes for the survivor.”

Weigh non-spouse beneficiaries for IRAs

If the surviving spouse expects to have enough savings and income for the remainder of their life, the couple may also consider non-spouse beneficiaries, such as children or grandchildren, for tax-deferred IRAs, Gagliardi said.

“If planned correctly, it can reduce the overall taxes paid on the IRA distributions,” he said. But non-spouse beneficiaries need to know the withdrawal rules for inherited IRAs.

Before the Secure Act of 2019, heirs could “stretch” IRA withdrawals over their lifetime, which reduced year-to-year tax liability. But certain heirs now have a shortened timeline due to changed required minimum distribution rules.

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