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Facing the “Survivor’s Penalty”? Here’s How to Avoid It After a Spouse Passes

Losing a spouse is a challenging life event, and many retirees may be unaware of the potential financial impact it can bring. Known as the “survivor’s penalty,” this issue often results in higher taxes for the surviving spouse, particularly when they shift from the “married filing jointly” tax status to the “single” status in subsequent years. While the penalty can lead to significantly increased tax bills, proactive financial planning can help ease the burden.

Why Does the Survivor’s Penalty Happen?

After a spouse passes, the surviving partner can still file “married filing jointly” for that tax year, provided they don’t remarry. However, in the following years, their tax filing status typically shifts to “single.” This change brings about narrower tax brackets and a smaller standard deduction, often resulting in a higher tax rate for the same or similar income.

In 2024, for example, the standard deduction for married couples filing jointly is as follows:

While for single filers, it’s:

Steps to Prepare and Minimize the Penalty

Financial experts recommend several steps for couples to reduce future taxes for surviving spouses:

1. Start with a Tax Projection

Financial planner Judy Brown advises creating a tax projection for each spouse to estimate how future income, deductions, and other factors will affect taxes if one spouse dies first. With this data, you can choose tailored strategies to mitigate potential tax increases.

2. Prioritize Lower Tax Brackets

Couples may experience lower tax brackets in early retirement, especially before required minimum distributions and Social Security benefits begin. To take advantage of this, consider:

• Prioritize Certain Withdrawals Earlier: Accessing pretax retirement accounts earlier in retirement, when income and tax rates may be lower, can help “fill up” lower tax brackets.

• Roth IRA Conversions: Converting to a Roth IRA in lower-income years can reduce taxable income later, potentially minimizing taxes once the surviving spouse begins filing as a single taxpayer.

Both strategies can potentially allow couples to make the most of the “married filing jointly” tax brackets and reduce the tax impact for the surviving spouse. Keep in mind that increasing income, even strategically, can lead to other tax implications, such as higher Social Security taxes or capital gains. The timing and amount of retirement account withdrawals or Roth conversions should be carefully planned with qualified professionals based on your specific circumstances.

The Bottom Line

Navigating the survivor’s penalty requires thoughtful, proactive planning. By understanding how tax brackets shift and taking steps like Roth conversions or prioritizing certain withdrawals earlier, couples can better protect the surviving spouse’s financial future. Financial planners or tax advisors can provide valuable guidance, helping retirees make tax-smart decisions that ease the survivor’s penalty and bring peace of mind.

*Disclaimer: This article provides general information about tax planning strategies and should not be construed as personalized tax or financial advice. Tax laws are complex and strategies discussed may not be suitable for your situation. Please consult qualified tax and financial professionals before implementing any strategies discussed here.

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If you want more resourceson building wealth as a solopreneur/entrepreneur, check these out:

• The Solo 401k handbook

• The Roth IRA handbook

• The Self-Directed IRA handbook

• The Guide to Paying Less in Taxes

• What is a Solo 401k?

• How to Open a Solo 401k