April 12, 2021
The Widow Tax | What is the Widow’s Tax Penalty?
The Widow Tax also called The Widow’s Tax Penalty and The Widow’s Tax Trap is a stealth tax that applies to married couples.
Atty. Chris Berry discusses The Widow’s Tax in this episode of Daily Wisdom.
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Episode Transcript
Widow Tax
Hi, this is Chris Berry with Castle Wealth Group, and today we’re going to talk about taxes in retirement. What happens after one spouse passes away? We call this the widow tax. And if you like this information, please make sure to subscribe to our YouTube channel and turn on notifications.
Christopher Berry is a leading estate attorney and advisor in the area of retirement and legacy planning. He has been featured in publications such as Forbes, Kiplinger’s, Crain’s Detroit, and more. He’s the host of the weekly radio show and podcast, The Chris Berry Show. He’s a national thought leader as it relates to retirement and legacy planning, and has authored the Amazon best-selling book, The Caregiver’s Legal Guide.
So today we’re talking about what I call the widow tax, and it’s one of these stealth taxes a lot of families don’t understand. It really only applies to married couples. So what happens is when you’re a married couple and two spouses who are still alive, then we have a married filing jointly tax bracket. So we have a larger tax bracket.
But what happens when one spouse passes away is now that tax bracket shrinks. And there’s some other things that happen, but typically what we find is that the surviving spouse needs about the same amount of income that the married couple needed. Because a lot of times they’ve downsized already, maybe have one car, maybe they traveled together, but the expenses typically remain roughly the same. And what that means is that surviving spouse has roughly the same income needs as when they were a married couple.
Tax Trap
And what this means is if we’re talking about pulling money from IRAs, if we’re talking about social security income, all of a sudden, if we need that same income, that income is taxed a lot more. So not only do we have more income tax for that surviving spouse, but also we have social security shrinking. Because now we had two social securities, and if one spouse passes away, they get knocked up to the higher social security, but one of those social security checks goes away.
So it’s a little bit difficult for that surviving spouse given that they still need the same amount of income, now they maybe have to pull more money from those pre-tax IRAs, and now they’re in a smaller tax bracket. So two things to think about in terms of avoiding the widow’s penalty. First of all, looking at moving money from those pre-tax accounts like IRAs, 401ks while you’re a married couple and while you still have this larger tax bracket, moving the money sooner rather than later.
The second thing would be to look at other alternatives to replace the income need for that surviving spouse. So maybe we have a life insurance policy that’ll ensure that that surviving spouse still has enough to get through and to leave the legacy that you were planning on.
Tax Bracket
But the big thing is thinking about this from a tax perspective, understanding that while you’re married, you have a larger tax bracket that once one spouse passes away, that tax bracket shrinks. And the income needs still is typically around the same it was, and with social security going away, which is only taxed at 85%, or 85% of social security being taxed, that means more money typically has to be pulled out of the IRAs, which puts more of a tax burden on that surviving spouse.
So again, one of the biggest opportunities right now is tax planning. One of the biggest risks is tax risk. So there are certain strategies to think about. And one thing to take into account is that widow’s penalty. What should we be doing to try to avoid it?
So this has been Chris Berry with Castle Wealth Group. Thank you so much. Make sure to subscribe.
Castle Wealth Group has clients across the nation and helps them [inaudible 00:03:54] plan, protect and preserve what is important by creating a retirement and legacy blueprint.