Losing a spouse is an emotionally challenging experience, and it can become even more difficult when faced with an unexpected financial burden – higher taxes. Data from the Centers for Disease Control and Prevention shows that there is a significant life expectancy gap between U.S. sexes, with women living longer than men. This gap often leads to a “survivor’s penalty” for older married women, triggering higher future taxes for them, as explained by certified financial planner Edward Jastrem. The year a spouse passes away, the survivor can file taxes jointly with the deceased spouse, but once they are considered single, they may face higher marginal tax rates due to a smaller standard deduction and different tax brackets.
Higher taxes can come as a shock to widows, and the situation may worsen with the expiration of individual tax provisions from former President Donald Trump’s tax legislation. These changes have resulted in lower tax brackets for individuals until 2025, making it crucial for surviving spouses to assess their financial situation. With the surviving spouse likely inheriting the deceased spouse’s individual retirement accounts, required minimum distributions remain consistent while facing higher tax brackets. The size of the inherited IRAs can significantly impact the tax burden on the survivor, emphasizing the importance of careful tax planning.
To mitigate the impact of higher taxes, experts suggest running tax projections before making changes to financial plans. One strategy recommended by financial planners is to consider partial Roth IRA conversions. This process involves transferring part of pretax or nondeductible IRA funds to a Roth IRA for tax-free growth in the future. Implementing this strategy gradually over several years can help minimize the overall taxes paid on the conversions, offering potential long-term savings for the surviving spouse.
It is crucial for surviving spouses to keep account ownership and beneficiaries updated to avoid potential tax pitfalls. In the case of inheriting assets, understanding the concept of a “step-up in basis” is essential. This means that the value of an asset on the date of death becomes the new basis for the survivor, impacting capital gains taxes. By knowing which spouse owns each asset and taking into account the step-up in basis, survivors can potentially reduce their tax liabilities in the future.
If the surviving spouse anticipates having sufficient savings and income for the rest of their life, they may consider designating beneficiaries other than their spouse for tax-deferred IRAs. This could include children or grandchildren and, if planned correctly, may lead to a reduction in overall taxes paid on IRA distributions. However, nonspouse beneficiaries must be aware of the withdrawal rules for inherited IRAs, especially after the passing of the Secure Act in 2019, which altered required minimum distribution regulations and limited the timeframe for withdrawals.
Navigating higher taxes after the loss of a spouse requires careful planning and consideration of various strategies. By understanding the implications of tax provisions, managing asset ownership, exploring beneficiary options, and seeking the guidance of financial experts, widows can better prepare themselves for the financial challenges that may arise. It is essential to proactively address these tax-related issues to secure a stable financial future and protect the legacy left by the deceased spouse.