How Losing a Spouse Can Double Your Tax Rate Overnight

Losing a spouse can affect every aspect of your life — especially if you are a senior and you have been married for a long time.

While the emotional effects of the loss are (rightly) your primary focus in most situations, you also need to be aware that there are profound financial complications that can arise when your spouse has passed on. In fact, the death of your husband or your wife could potentially send your tax rate soaring overnight.

Here’s why your taxes could increase so much as a result of the death of your spouse, along with some tips on how you may be able to prepare for or prevent this undesirable financial outcome from becoming a reality. 

Why does the death of your spouse send your tax rate soaring?

When your spouse dies, and you are younger and working, there’s a very good chance that your income will decline when your husband or wife’s paychecks stop coming. If you are retired, though, then your income may not go down by much even after your partner has passed on, since you may be collecting pension income or income from retirement accounts that will stay steady.

But, while your income may not change a whole lot, your tax filing status will change.

Since you will no longer be able to file your taxes as married filing jointly in the future, you’ll most likely have to switch to filing as single, head of household, or qualifying widow(er). This shift means you may get stuck paying a “survivor’s penalty” because of the change in tax filing status. The shift from filing as a married joint filer to a new filing status could:

• Result in you being pushed into a higher tax bracket, since the brackets are narrower for single filers than married joint filers. 
• Cause you to lose tax deductions that saved you money. You’ll typically lose around half of your standard deduction. With the new tax deduction that President Trump put in place for retirees that totals up to $6,000 per person, you will also lose the $6,000 deduction your spouse may have been claiming (this deduction is in effect through 2028). 
• Cause part of your Social Security benefits to become taxable, or result in more of your benefits being taxable, since you pay tax on at least part of your Social Security once your provisional income hits $25,000 as a single filer or $32,000 as a married joint filer. 
• Result in your Medicare premiums soaring in the future because you may be affected by Income-Related Monthly Adjustment Amount (IRMAA) due to losing your joint filer status. IRMAA can apply once your income exceeds certain limits (the key income is your MAGI from two years prior)

Unfortunately, moving into a higher bracket, losing deductions, and suddenly finding yourself paying much higher Medicare premiums can seriously affect your ability to continue covering your financial obligations once your spouse is no longer with you.

How can you prevent a tax hit when your spouse passes?

If you don’t want to end up with a huge IRS bill every year after losing your husband or wife, it is important to incorporate tax planning as part of your estate planning. 

A financial advisor can help you to explore options such as investing in Roth accounts or converting traditional accounts to Roths, as well as making other smart financial choices to prepare for your partner’s death.

While no one likes to think about these subjects, the fact remains that in any lifelong marriage, one spouse is going to outlive the other. When this happens, the last thing you need is to compound the tragedy and add stress to your life because you can no longer afford to maintain your standard of living, given how much your taxes go up.