Losing a spouse can be one of the most emotionally difficult events anyone can experience. The Widow’s Tax, which some consider to be one of the more repulsive parts of the tax code, can add financial pain to an already emotional time. Here is how it works.
IRS tax code treats married people very differently than single people. We have one set of tax rates for single people, and a separate set of rates for those who are married. Because of this, when a spouse dies, the surviving spouse may often face a drop in income and a hike in income taxes at the same time
A Hypothetical Widow’s Tax Scenario
Consider this hypothetical: Janet and her husband, Steve, are both 75 years old. Steve, who retired ten years ago, worked as an electrician, while Janet stayed home to raise their three children. After Steve retires, he begins to receive a monthly pension of $2,000 with a 100% survivorship benefit (meaning Janet will continue to get $2,000 per month when he passes). Steve also receives $2,000 per month in Social Security, while Janet collects a spousal benefit of $1,000 per month from Social Security.
They each have IRA accounts. They’ve been taking withdrawals from them for a combined annual amount of $25,000. That adds up to $85,000 of gross annual income. We’ll assume they take the standard deduction, which is $35,500 for those over 65, married, and filing jointly. They’ll also qualify for the $6,000 per person Enhanced Senior Deduction because they’re both over age 65 ($12,000 combined).
On December 15th Steve passed away. Janet is devastated. She lost her best friend and the love of her life. In addition to the tremendous emotional challenges she’ll face, here are some of the financial changes that Janet may not be expecting:
1) Social Security will decline
When both spouses are collecting Social Security and one passes, the surviving spouse generally keeps the larger of the two benefits. In this example, Steve received $2,000 per month and Janet received $1,000 for a monthly total of $3,000.
After Steve’s death, Janet switches to his $2,000 benefit and loses $1,000 per month of household income.
2) A larger portion of her Social Security will be subject to taxes
How much of your Social Security is taxable depends on your total income, not just the benefit itself. The calculation is complicated, but the key point is this: as income rises, a larger percentage of Social Security becomes taxable.
While Steve was alive, Janet and Steve filed a joint return. At that income level, about 70% of their combined Social Security Benefits were subject to tax. After Steve’s death, Janet must file as a single taxpayer. Even though her total income goes down, her filing status changes the rules. As a result, 85% of her Social Security is now taxable.
In dollar terms, their household originally received $36,000 of Social Security, with $25,550 counted as taxable income. After Steve’s death, Janet receives $24,000 of Social Security, yet $20,400 of it is taxable.
This is the heart of the Widow’s Tax: less income, but more of it subject to taxation. When combined with the loss of deductions and narrower tax brackets for single filers, Janet’s taxable income rises from $47,150 to $55,150, even though her cash flow drops. That increase pushes her total tax bill up significantly.
3) She will lose some deductions
Janet will now be subject to the single standard deduction of $18,150. In the prior year, Janet and Steve qualified for the standard deduction of $35,500 for married couples filing jointly. Additionally, the Enhanced Senior Deduction she will be eligible for would be reduced from $12,000 for a married couple with both spouses over age 65, to $6,000.
4) More of her income will be subject to a higher tax bracket
As a married couple, their taxable income was $27,050. That meant $24,800 of their taxable income was taxed at 10%, and only $2,250 was taxed at 12%. As a single filer, her taxable income is going to be $45,250. Which means $12,400 of her income will be taxed at 10%, and $32,850 will be taxed at 12%.
| Tax Rate | Single | Married Filing Jointly |
|---|---|---|
| 10% | $0 to $12,400 | $0 to $24,800 |
| 12% | $12,401 to $50,400 | $24,801 to $100,800 |
| 22% | $50,401 to $105,700 | $100,801 to $211,400 |
| 24% | $105,701 to $201,775 | $211,401 to $403,550 |
| 32% | $201,776 to $256,225 | $403,551 to $512,450 |
| 35% | $256,226 to $640,600 | $512,451 to $768,700 |
| 37% | $640,601 or more | $55,1$768,701 or more |
5) Less income with more taxes
Because of the factors mentioned above, Janet’s income would decline from $85,000 to $73,000. But her taxes would increase from $2,750 (or $1,375 per person) to $5,182 ($5,182 per person).
| 2026 | 2027 | |
| Total Social Security | $36,000 | $24,000 |
| Taxable Portion of Social Security | $25,550 | $20,400 |
| Pension | $24,000 | $24,000 |
| IRA Withdrawals | $25,000 | $25,000 |
| Adjusted Gross Income | $74,550 | $69,400 |
| Standard Deduction | $35,500 | $18,150 |
| Enhanced Senior Deduction | $12,000 | $6,000 |
| Taxable Income | $27,050 | $45,250 |
| Taxes | $2,750 | $5,182 |
| Taxes Per Person | $1,375 | $5,182 |
How the widow tax adds up
While one could argue that expenses will likely decline when a spouse passes, many major costs, such as housing, often stay the same. Regardless of how many people live in the home, mortgage or rent payments, property taxes, utilities, and homeowner’s insurance typically don’t change much.
When a spouse passes, it is an extremely emotional and often frightening time. You’ve spent so much time with this person, and suddenly, you’re faced with reimagining what your life will look like without them.
In every marriage, there’s a natural division of responsibilities, such as yard work, laundry, cooking, bill paying, budgeting, investing, and tax preparation to name a few. After a loss, the surviving spouse will either have to take over some of these tasks or hire someone to do them at an additional cost.
Timing Your Filing Status
One important point to know is that in the year your spouse passes away, you’re still allowed to file your tax return as married filing jointly, as long as your spouse was alive for at least one day during that tax year. In our example, Janet’s husband passed away at the end of December. Had he passed away earlier in the year, such as January, she may have had the opportunity to take advantage of those more favorable married tax rules by doing things like a Roth IRA conversion or additional IRA withdrawals.
These strategies can sometimes be helpful because the married filers generally benefit from a higher standard deduction, wider tax brackets, and lower taxation of Social Security income.
Protecting Your Financial Future
The additional taxes of $2,432 and loss of income of $12,000 reduces the total of Janet’s spendable income by a whopping $14,432 per year. Knowledge is power. Work with qualified professionals to develop a plan that can help you address any gaps that you may have. It may not help with your grief, but it will almost certainly serve to reduce your stress and potentially prevent you from making some costly mistakes.
Originally published September 2016
