Some face a ‘survivor’s penalty’ after a spouse dies — how to avoid it

Losing a spouse can be devastating, and survivors often face a costly surprise — higher future taxes. But couples can plan ahead to reduce the burden, experts say.

The issue, known as the “survivor’s penalty,” happens when shifting from married filing jointly to single filer, which can lead to higher tax rates, depending on the couple. Single filers have less generous tax brackets, a smaller standard deduction and lower thresholds for other tax breaks.

It’s one of the “most overlooked and financially damaging tax events,” said certified financial planner Gregory Furer, CEO and founder of Beratung Advisors in Pittsburgh. “And it often appears at the worst possible time.” 

The survivor’s penalty can impact heterosexual couples who typically have different life expectancies, which may require multi-year tax planning, financial experts say.

In 2023, there was more than a five-year life expectancy gap between the sexes, according to the latest data from the Centers for Disease Control and Prevention. In 2023, the life expectancy was 81.1 years for females and 75.8 years for males.

If you inherit an individual retirement account from a deceased spouse, you could have larger required minimum distributions, or RMDs, at the higher tax brackets for single filers, according to Furer.

This can increase federal income taxes, boost Medicare Part B and Part D premiums, and raise Social Security taxes, among other issues. “It is a tax trap that hits widows and widowers at a deeply vulnerable time,” he said.

The surviving spouse could pay higher taxes on Roth individual retirement account conversions, which some investors use for legacy planning, experts say. The strategy incurs upfront levies but can kickstart tax-free growth for heirs.

“Your flexibility goes down,” said CFP Edward Jastrem, chief planning officer at Heritage Financial Services in Westwood, Massachusetts.

Survivors could also pay more for large withdrawals from pretax accounts. For example, let’s say you need cash to purchase another home. If you withdraw $300,000 from a pretax IRA, your taxes could be higher as a single filer, Jastrem said.

Plus, higher income can trigger additional tax consequences more quickly for single filers, he said. You could pay the so-called net investment income tax sooner, which applies to capital gains, interest, dividends, rents, and more. You could also lose eligibility for certain tax breaks.  

Typically, “proactive planning” happens five to 10 years before retirement, when there is still time to “shape future tax outcomes,” Furer of Beratung Advisors said.

For example, some couples may consider “strategic Roth conversions” to reduce pretax retirement balances and the survivor’s future RMDs, he said.

Of course, you’ll need to run multi-year projections to see when you’ll pay the least amount of tax on the converted balance.

You also need to plan for retirement income, such as when to take Social Security, and withdrawals from pensions and taxable investment accounts, which can help “soften the impact on the surviving spouse,” Furer said.