Broker Check

Understanding Why Taxes Increase When a Spouse Passes Away

November 07, 2023

In marriage, we promise to love each other for better, worse, richer, and poorer, in sickness and health, until death do us part. The death of a spouse is emotionally overwhelming, and the grief is real. While often not discussed, an important topic to understand is the widow’s penalty or why taxes can increase when a spouse passes away. We understand the emotional weight of losing a partner, and if this recently happened to you, we want to provide clarity and support during this challenging period. Also, for some couples reading this article, this time has not yet arrived, and we want you to know there are some tax planning techniques we employ while both spouses are alive to help ease the impact of the widow’s penalty. In this post, we will explore the why – two key factors that can lead to a higher tax bill for the surviving spouse: change in filing status and the loss of deductions.

Change in Filing Status

One of the most significant factors impacting the tax you pay is your filing status and the change from Married Filing Jointly to Single or Head of Household is a big one. The tax brackets for single filers are less favorable than those for married filers. Look at the picture below; a single tax filer is pushed into the 22% bracket after $44,725 of taxable income, while a married tax filer has $89,450 before they get to the 22% bracket.

Loss of Deductions

In addition to the tax brackets changing, a single filer or our surviving spouse has a lower standard deduction. A deduction offsets your taxable income, so a lowered deduction increases your taxable income and your tax liability. For the tax year 2023, the standard deduction for married filing jointly is $27,700, married filing separately and single $13,850, and head of household $20,800. You can take additional standard deductions if you are 65 or blind - $1,850 for single or head of household and $1,500 per qualifying individual married filing jointly or separately. If 65 or older and blind, the additional standard deduction is $3,700 if you are single or head of household and $3,000 per qualifying individual if married filing jointly or separately.

Loss of Income

While a loss of income will not cause your taxes to go up, this could create the perfect storm of financial hardship for a survivor – taxes going up and income going down. That certainly feels like a penalty! Upon the passing of one spouse, the survivor likely will have less income. A surviving spouse cannot collect their Social Security and that of their deceased spouse. Social Security will only pay one benefit to the surviving spouse – their retirement or survivor benefit. You will typically receive the higher benefit if you qualify for both benefits. There may be a planning opportunity here if both individuals were not already claiming Social Security, so seeking guidance is helpful. This guidance is something the professionals here at Harford Financial Group can provide.  

It is important to remember that Social Security is not taxed like other income – it has a preferential tax treatment. If your income is low, your Social Security could be tax-free. You may pay taxes on 50% or 85% of your Social Security as your income increases. The IRS applies a calculation to determine what is called your provisional income to determine what amount of your Social Security is taxable – 0%, 50%, or 85%. This calculation looks at your adjusted gross income plus half of your Social Security benefits plus tax-exempt income. So, if a surviving spouse takes a distribution from their retirement accounts to make up for a spouse’s lost Social Security, there is a chance it will cause more of their Social Security income to become taxable.

Another factor to consider is whether the deceased spouse received a pension or annuity income and if this income has survivor benefits. Some do not have survivor benefits, and some have benefits reduced to a fraction of what the deceased got; 50%, 75%, or 25% are typical figures. Other times, we see a total income replacement for the surviving spouse. Knowing what will happen to these income streams while you are alive is helpful so you can plan for the future.  

Our hope is now that you know about the widow’s penalty, we can use this as a planning opportunity to understand what the surviving spouse’s income and tax situation could look like and to make any needed proactive adjustments to set you up so that should you lose a spouse one of your worries will not be taxes or the dreaded widow’s penalty.