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How to Prepare for the “Survival Penalty” Before a Spouse Dies

Nature

  • After the death of a spouse, single older women typically switch from filing married to filing single on their federal taxes.
  • With a standard deduction and smaller tax brackets, surviving spouses may face higher taxes.
  • However, spouses can consider advance tax planning, such as weighing Roth individual retirement account conversions, account ownership and beneficiaries.

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Many older women outlive their spouses and cannot expect higher taxes in the future after suffering this loss. But there are ways to prepare, financial experts say.

American women have a significantly higher life expectancy than men, according to data from the Centers for Disease Control and Prevention. In 2021, life expectancy at birth was 73.5 years for men compared to 79.3 years for women.

As a result, many married women ultimately face a “survivor penalty,” resulting in higher future taxes, according to certified financial planner Edward Jastrem, director of planning at Heritage Financial Services in Westwood, Massachusetts.

Learn more about women and wealth:

Here’s a look at more coverage in CNBC’s Women & Wealth special report, where we explore ways women can increase their income, save and make the most of opportunities.

In the year a spouse dies, the survivor can file taxes jointly with their deceased spouse, known as “married filing jointly,” unless they remarry before the end of the year tax.

After that, many older survivors file their taxes alone with “single” filing status, which can include higher marginal tax rates, due to a standard deduction and smaller tax brackets, in depending on their situation.

For 2023, the standard deduction for married couples is $27,700, while singles can only claim $13,850. (The rates use “taxable income,” which is calculated by subtracting the greater of the standard or itemized deductions from your adjusted gross income.)

Higher taxes may be “the biggest shock” for widows — and it could be even worse once individual tax provisions disappear from legislation signed by former President Donald Trump, said George Gagliardi, CFP and founder of Coromandel Wealth Management in Lexington, Massachusetts.

Before 2018, the individual brackets were 10%, 15%, 25%, 28%, 33%, 35% and 39.6%. But through 2025, five of these brackets are lower, at 10%, 12%, 22%, 24%, 32%, 35% and 37%.

Typically, the surviving spouse inherits the deceased spouse’s individual retirement accounts, and the required minimum distributions are about the same. But the surviving spouse now faces higher tax brackets, Gagliardi said.

“The larger the IRAs, the bigger the tax problem,” he said.

Some surviving spouses could face higher taxes in the future, but it’s important to do tax projections before changing the financial plan, experts say.

Spouses can consider partial Roth IRA conversions, which transfer a portion of pretax or nondeductible IRA funds to a Roth IRA for future tax-free growth, Jastrem explained.

It is often best to do this over multiple years to minimize the overall taxes paid for Roth conversions.

George Gagliardi

Founder of Coromandel Wealth Management

The couple will have to pay taxes upfront on the converted amount, but can save money with lower tax rates. “It’s often best to do this over multiple years to minimize the overall taxes paid for Roth conversions,” Gagliardi said.

It’s always important to keep account ownership and beneficiaries up to date, and failing to plan could be costly for the surviving spouse, Jastrem said.

Typically, investors realize capital gains based on the difference between the sale price of an asset and the “basis” or initial cost. But when a spouse inherits assets, they receive what’s called a “step-up in basis,” meaning the value of the asset on the date of death becomes the new basis.

A missed opportunity to upgrade could result in higher capital gains taxes for the survivor.

Édouard Jastrem

Director of Planning at Heritage Financial Services

That’s why it’s important to know which spouse owns each asset, especially investments that may be “highly appreciated,” Jastrem said. “A missed opportunity for advancement could result in higher capital gains taxes for the survivor.”

If the surviving spouse hopes to have enough savings and income for the rest of their life, the couple may also consider beneficiaries other than the spouse, such as children or grandchildren, for tax-deferred IRAs. Gagliardi said.

“If planned properly, it can reduce the overall taxes paid on IRA distributions,” he said. But non-spouse beneficiaries need to know the withdrawal rules for inherited IRAs.

Before the Secure Act of 2019, heirs could “stretch” IRA withdrawals throughout their lives, reducing the tax liability from year to year. But some heirs now have a shortened time frame due to changes to the required minimum distribution rules.

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