5 Ways To Avoid the ‘Widow’s Penalty' Tax After Losing a Spouse

Losing a spouse can be one of the most devastating experiences a person goes through. The financial burden that comes along with that loss can also be devastating in different ways and may change your financial obligations when tax time rolls around.

This change is often called the “Widow’s Penalty,” which can significantly increase your tax burden when your filing status changes after the death of your spouse. This can move you from the 24% tax bracket you likely used when completing your taxes married filing jointly to 35% when filing as single.

Here are some tips that may help minimize the financial impact, stretch your retirement dollars further, and lower your financial stress as you work through your significant loss.

Let’s begin by talking about taxes and some of the things you may be able to expect. If you lose your spouse, you may be able to use “qualifying widow(er)” as your status for up to two years.

You may want to use this time to look at your own IRA and your spouse’s IRA and to figure out the best options for your financial future.

Whether the tax breaks during this time will be better than filing single can depend on your unique personal situation, and a tax professional may be able to help you decide the best course of action moving forward.

There are tax-efficient investment options that may help lower that end-of-year tax burden. Some examples are tax-managed funds and index funds. You may want to see about diversifying your investments to include these or other tax-efficient options.

You might also consider spreading out any distributions from retirement accounts over a longer period of time to keep yourself in a lower tax bracket. Diversification is often seen as a strength of portfolios and this time may be an opportunity for you to look into the options that best suit your needs now and into the future.

You may also want to check with your portfolio manager about something called a step-up in basis. This can provide a tax break on assets such as stocks and mutual funds.

Donor-advised funds and qualified charitable distributions can help offset taxes and become a way to honor a spouse that has passed, especially if they wanted a portion of their estate to be used as a donation to a cause near and dear to their heart.

You may be able to work with a financial advisor to look into tax-efficient charitable giving strategies.

If you’re on Medicare, watch out for rising premiums due to a surcharge. Those collecting Medicare will be subject to a change in their Income-Related Monthly Adjustment Amounts (IRMAA), which will change when they begin filing single.

A widow(er) can ask to have those IRMAAs lowered after the loss of their spouse. You may also want to look into other options with your healthcare and medical needs that could be impacted by the loss of your spouse. It may be worth it to check into any free or community resources available to you.

If you have an opportunity to meet with an advisor before your spouse's death, they may be able to help you make some changes ahead of time that will lower your tax burden, like investing in a partial Roth IRA conversion.

You may also want to look at health savings account options. Additionally, if you begin looking for help early in the tax year, that’s more time to prepare for the changes that come along at tax time.

A tax professional can also help you navigate the complexities of the different laws and deductions that may impact your situation.

Losing a spouse can be one of the most difficult events you face in life. Adding to the emotional toll can be lots of financial decisions to make and the stress of making changes to better your financial situation.

You can help prepare yourself financially by looking at your tax filing status and investment options. You may want to bring on a financial advisor or tax expert soon to help you navigate many of the complexities that could impact you and the investments you shared with your spouse.