How the Death of a Spouse Affects Taxes and Retirement Income

Posted on

Retirement Nest EggMany people mistakenly believe their expenses will be half as much as a single person than as a couple. This is true of some expenses, like food and clothing. However, larger expenses related to housing probably won’t decline at all unless you move. Retirement planners generally project expenses will drop by only 20% at the death of the first spouse. Considering expenses will only be slightly lower as a single person, it’s important to evaluate what will happen to income when you are suddenly single.

Social Security

When both spouses are drawing retirement income, the survivor will be able to continue drawing the higher benefit of the two. This means Social Security income could be cut in half if both spouses were receiving the same benefit. The income will fall by less than half if one spouse’s benefit is greater than the other. This is an important consideration while planning when to start drawing benefits. The older spouse with the larger potential benefit may want to wait as long as possible to begin drawing Social Security — holding off means the older spouse will be able to pass on their higher benefit to the younger survivor.


All companies are required to offer payout options before starting your monthly income. These payments will continue for the rest of your life. Choose wisely! The payouts options vary among plans, but the following choices are offered most frequently:

  • Life Income – This option will provide an income for as long as you live, however, the pension dies with you. Life income will give you the maximum monthly income, but your spouse is not eligible to receive any benefits.
  • Joint and Last Survivor (J&LS) – With this option you will receive a pension for life and provide a survivor income for the life of your spouse. This survivor income usually comprises a percentage of your pension income – 50%, 67%, 80%, 100%. Keep in mind that your monthly pension will be reduced when you add a beneficiary. The greater the benefit to the beneficiary, the smaller your pension income will be to you.

The pension distribution option is not flexible. Let’s say that you choose the joint and last survivor option. Your monthly payment is reduced to cover your spouse if you are the first to die. What happens if your spouse dies before you? You don’t need the survivor protection any more but the payment does not revert to the higher amount. You will be paying for a survivor benefit that you no longer need for the rest of your life. Even if you were to remarry, you cannot designate your new spouse as beneficiary.

Income Taxes

You’ve planned your income well, and minimized the reduction in Social Security benefits, which is the good news. The pension election allowed the survivor to continue drawing the same monthly income. The death of the first spouse had very little impact on the survivor’s income. Unfortunately, the not-so-good news is that the IRS is going to want a bigger slice because the survivor will have to file as a single taxpayer.

The difference between filing your taxes jointly versus as a single taxpayer can be significant.

Common Scenario

Doug and Betsy have been married for 44 years. Doug is 67 and Betsy is 65. As a couple, they have investment income of $20,000, Social Security benefits of $30,000, and pension income of $20,000. They elect the standard deduction and have a federal income tax bill of $4,000 in tax year 2014. On $70,000 of income that $4,000 is an effective tax rate of 5.7%. Now let’s say, in an unfortunate turn of events, that Doug dies suddenly. How would the tax situation change? Social Security benefits would be reduced to $20,000. Investment and pension income would remain the same. However, Betsy would owe $7,200 in federal tax on $60,000 of income. The effective tax rate jumps to 12%!

How is this possible?

The first issue is the taxation of Social Security benefits. Not all benefits are subject to tax and the amount is based on your other income and your filing status. Joint filers have a higher income threshold before benefits become taxable. In the example, only $15,350 of the $30,000 Social Security income is taxable as a couple. When filing single, $17,000 of the $20,000 Social Security benefit becomes taxable.

Secondly, the standard deduction and personal exemption are nearly cut in half making more of the income subject to tax. This issue will not be as dramatic for taxpayers who itemize deductions where only the personal exemption would be reduced.

Finally, single taxpayers reach higher tax brackets more quickly. In the example scenario, part of Betsy’s taxable income reaches the 25% tax bracket. The combination of all these factors caused her tax bill to nearly double.

As humans, we hope never to experience the death of a spouse, but it’s best for couples to be prepared. The death of a spouse is frequently rated as the most traumatic and stressful experience a person will face. Careful planning can help minimize the financial repercussions of the loss.

Rick’s Tips:

  • Social Security income can drop by as much as 50% when the first spouse dies.
  • Many factors need to be considered before making your irrevocable pension income decision.
  • Income taxes are likely to increase when the survivor changes their filing status from married (filing jointly) to single.

Will Your Money Last Through Retirement?

No one wants to run out of money. But without goals and a solid plan,
how can you know for sure whether you’re on the right track?

Will I be able to maintain my current lifestyle?

What will my monthly income be in retirement?

Can I protect my hard-earned savings and still
have the income I want?

Rodgers & Associates answers questions like these every day.

Get Personalized Answers
2025 Lititz Pike, Lancaster, PA 17601
Phone: 717-560-3800, Toll-Free: 888-876-3437