facebook twitter instagram linkedin google youtube vimeo tumblr yelp rss email podcast phone blog search brokercheck brokercheck Play Pause
[Video] What is the Widow's and Widower's Tax? Thumbnail

[Video] What is the Widow's and Widower's Tax?

In this short YouTube video, I describe what the widow's or widower's tax is. With careful tax planning, you can avoid this this extra tax hit at an already difficult time in your life. 

We have talked about a few concepts to reduce lifetime tax liability, including asset location and Roth IRA conversions.

Another concept to consider to reduce lifetime tax liability is the Widow's or Widower's Tax. Again, I know these aren't exciting concepts for people, but they can certainly move the proverbial needle!

Widow's or Widower's Tax - What do I mean by that? In the illustration above, we have a married couple, Spouse A and Spouse B. They have plenty of money - that's not the problem. They worked and saved during their accumulation phase, and they did a great job growing their nest egg.

Let's say they want to live on $8,000 a month of income. Here's how it's going to go: 

  • They're going to get $3,000 from Social Security,
  • They’re going to have a $3,000/month pension coming in the door,
  • And they're taking $2,000/month out of their IRAs. 

This gets them to $8,000 a month or $96,000 per year, and after the standard deduction, they’re going to owe the federal government $7,185, an average tax rate of 7.9%.

Now, if you are married, what do you suppose the odds are that you and your spouse die on the same day? Not good, right? Almost zero.

So, the surviving spouse is going to be a widow or a widower, and now they walk into their CPA or broker that helped them before, and they still have plenty of money. Again, that's not the problem. But they weren't working with a retirement specialist, a distribution advisor, or someone that looked at their situation from a tax perspective, and now they say, “Look, I just lost the love of my life. I hope I don't have to worry about money. I just want to maintain the lifestyle that I have.”

And the good news is, they have plenty of money, but…

Now, they have to rework where the income comes from, to get them to that same $8,000/month. And here's the bad news: they didn't do any tax planning, and the tax bill on that same income, because they're no longer married and they have to file as single now, is $12,711, an average rate of 13.8%.

They used to pay 7.9% on the same income. That's a 75% increase in their tax bill because their spouse died. And the odds of this happening to you are very high if you're married.

So, if you haven’t done any tax planning to take advantage of the beneficial tax treatment of being married, you really need to start, because the tax code is much more advantageous while you're married!

A CERTIFIED financial planner™ professional can help you plan for your retirement. Schedule a call today so we can talk about your situation. 

Schedule a Call