After a spouse dies, some retirees face higher taxes, but it's possible to reduce the burden, experts say. The "survivor's penalty" happens when you shift from married filing jointly to single on your taxes. You can avoid the penalty by running tax projections and leveraging lower tax brackets early.
Filing the Year Following the Year of Death
It's called the qualifying widow(er) tax filing status. The qualifying widow status, which provides many of the same tax benefits as the married filing jointly status, is not available to everyone.
Unfortunately, even with less income hitting the tax return, widowed tax filers commonly end up paying higher taxes due to the compression of tax brackets and the dramatic standard deduction decrease for single filers.
A widow(er)'s exemption is a reduction of taxes allowed following the death of a spouse. It is intended to ease a potential financial burden on the surviving spouse and family that could result from their loss. The relief provided by states generally is in the form of reduced property tax.
You could get a monthly payment based on the work history of the family member who died. You might also get Medicare based on their work history if you're 65 or older, or you have a disability or end-stage renal disease (ESRD).
Note: The Qualifying Surviving Spouse standard deduction is the same as Married Filing Jointly. Although there are no additional tax breaks for widows, using this filing status means your standard deduction will be double the Single filer status amount.
Neutralizing the tax hit
The most effective way to mitigate the widow's penalty is to take advantage of your joint filing status in the year of your spouse's death. Slott recommends using that window to convert as much of your traditional IRA as possible to a Roth.
Taxpayers who do not remarry in the year their spouse dies can file jointly with the deceased spouse. For the two years following the year of death, the surviving spouse may be able to use the Qualifying Widow(er) filing status.
Social Security is a key source of financial security to widowed spouses. About 7.8 million individuals aged 60 and older receive Social Security benefits based, at least in part, on a deceased spouse's work record.
Taxpayers can claim the qualifying surviving spouse filing status if all of the following conditions are met: You were entitled to file a joint return with your spouse for the year your spouse died. Have had a spouse who died in either of the two prior years. You must not remarry before the end of the current tax year.
We base the benefit amount on the earnings of the person who died. The more the worker paid into Social Security, the greater your benefits will be. We use the deceased worker's basic benefit amount to calculate the percentage survivors can get.
Qualifying widow or widower
Surviving spouses with dependent children may be able to file as a Qualifying Widow(er) for two years after their spouse's death. This filing status allows them to use joint return tax rates and the highest standard deduction amount if they don't itemize deductions.
Provided you remain unmarried for two years following the death, you can use the qualified widow(er) tax filing status for up to two years after the year your spouse dies. You may use the married filing jointly status in the year your spouse dies, or married filing separately (if you prefer).
In simple terms, the widow's penalty refers to a situation where a surviving spouse may experience a reduction in their overall income or financial benefits, but an increase in taxes, after their partner passes away.
Funeral expenses aren't tax deductible for individuals, and they're only tax exempt for some estates. Estates worth $11.58 million or more need to file federal tax returns, and only 13 states require them. For this reason, most can't claim tax deductions.
The full retirement age for survivors is age 66 for people born in 1945-1956. And the full retirement age will gradually increase to age 67 for people born in 1962 or later. Your widow or widower can get reduced benefits as early as age 60.
If basis step-up does not occur, however, federal tax code section 121(b)(4) provides that a surviving spouse will get the $500,000 gain exclusion if the residence is sold not later than two years after the date of death of the spouse and if all other conditions are met (i.e., each spouse occupied the property for two ...
If the deceased worked long enough under Social Security, the widow/widower can receive full benefits at the full retirement age or reduced benefits as young as 60. The amount of the benefit depends on the earnings of the deceased.
After a spouse dies, the survivor may face higher future taxes when switching to single filer for federal taxes. But you can minimize the possible tax hit with advanced planning, such as Roth individual retirement account conversions, account ownership and beneficiaries.
The widow(er)'s insurance benefit rate equals 100 percent of the deceased worker's primary insurance amount plus any additional amount the deceased worker was entitled to because of delayed retirement credits.