Roger and Cindy had been married forty-five years when it happened. They were working together in the back yard. The sun was shining; the sky was blue; the temperature was absolutely perfect. Roger sat down to rest while Cindy went inside to get them something to drink. When she came back, Roger was gone. There were no warning signs. There had been no extended illness. But suddenly, in a heartbeat, Cindy was alone.
As the months passed after Roger’s death, Cindy noticed things that didn’t make sense. Her income went down but she owed more money when she filed her tax return. Then, she got a notice that her Medicare premiums were going up. What happened? Like many surviving spouses, Cindy was the victim of the Widow’s Penalty.
The widow’s penalty is not an official tax or fine, but it can make life harder for someone after their husband or wife passes away. When two people are married, they get special tax benefits, like lower tax rates and bigger deductions. But when one spouse dies, the person left behind has to file taxes as a single person instead of married. This can mean they have to pay more taxes, even if their income stays the same or goes down. It can also affect things like Social Security benefits and Medicare costs, making it even tougher financially for the surviving spouse.
Social Security
The effect of the widow’s penalty on Social Security is lower household income. When both spouses are receiving Social Security benefits and one spouse dies, the survivor continues receiving the higher of the two amounts, but the smaller one goes away. You cannot receive both.
Similarly, if one person has a pension and they pass away, that income will either stop entirely or will be reduced as the pension converts to a survivor’s benefit pension.
Either way, there is likely to be a significant loss of income.
Taxes
As for taxes, when a couple files taxes jointly, they benefit from larger standard deductions, various tax breaks, and higher income tax thresholds. However, after a spouse dies, the surviving partner must transition to a “Single” filing status within one to two years after their spouse’s death.
- Survivors can find themselves in a higher tax bracket because income rates for single filers are higher.
- Standard deductions and eligibility for certain credits are more generous for joint filers than for single individuals.
- A larger portion of Social Security benefits may become taxable. For example, single filers pay:
- Zero tax on Social Security if combined income is less than $25,000
- Pay tax on 50% of Social Security if income is between $25,000-$34,000
- Pay tax on 85% of Social Security if income is above $34,000
Joint filers pay:
- Zero tax on Social Security if combined income is less than $32,000
- Pay tax on 50% of Social Security if income is between $32,000-$44,000
- Pay tax on 85% of Social Security if income is above $44,000
- Required minimum distributions from retirement accounts may push a widow(er) into a higher tax bracket faster than when filing jointly, increasing overall tax liability.
In tax year 2025 a retired married couple filing jointly with an annual income of $96,000 will be in the 12% tax bracket. If one spouse dies and the household income drops to $24,000, the single-filer survivor will be in the 22% bracket. Plus, the standard deduction for taxpayers who switch from joint to single filing is cut in half. The end result—higher taxes and less deductions.
Medicare premiums
At certain income levels, the death of a spouse can even impact the cost of Medicare. Premiums for Medicare Parts B and D are calculated based on modified adjusted gross income (MAGI). If MAGI is too high, it triggers Medicare’s Income-Related Monthly Adjustment Amount (IRMAA), causing Part B and Part D premiums to go up. It does not, however, affect the premium for Medicare supplement policies.
What can be done to combat the widow’s penalty? Plan ahead.
Retirement income can be divided into two main types: taxable and non-taxable.
Taxable income includes streams such as required minimum distributions from a 401(k) or IRA, while non-taxable income streams come from vehicles such as Roth 401(k)s, Roth IRAs, indexed universal life policy death benefits and, for qualified medical expenses, withdrawals from health savings accounts (HSA).
By structuring retirement income to reduce the reliance on taxable sources, the widow’s penalty can be, at least partially, circumvented.
For example, by converting traditional retirement accounts to Roth IRAs, it’s sometimes possible to drop the survivor’s income low enough to avoid some of the penalties, such as increased tax brackets. But in the year the conversion is made, there will be taxes to be paid, and it may trigger the widow’s penalty.
This information is presented for informational purposes only and does not constitute an offer to sell, or the solicitation of an offer to buy any investment products. None of the information herein constitutes an investment recommendation, investment advice or an investment outlook. The opinions and conclusions contained in this report are those of the individual expressing those opinions. This information is non-tailored, non-specific information presented without regard for individual investment preferences or risk parameters. Some investments are not suitable for all investors, all investments entail risk and there can be no assurance that any investment strategy will be successful. This information is based on sources believed to be reliable and Alhambra is not responsible for errors, inaccuracies, or omissions of information. For more information contact Alhambra Investment Partners at 1-888-777-0970 or email us at info@alhambrapartners.com.
