A Quiet Tax Hit Many Widows Never See Coming

Losing a spouse is hard enough.

What many people don’t know is that a tax surprise often follows.

It is called the widow's penalty.

Here is how it works.

While you are both alive, you file your taxes as a married couple. You get a bigger standard deduction. 

And you can earn more before you hit the higher tax brackets.

But the year after a spouse passes, the survivor usually files as a single person.

The income often stays about the same. 

The Social Security check may drop only a little. The RMDs keep coming.

But now that same income is taxed as a single filer.

Smaller deduction. Higher brackets. More of the Social Security taxed. Higher 

Medicare premiums too.

The bills go up, even though the money coming in went down.

The good news is you can plan ahead while you are both still here.

One of the best tools is a systematic Roth conversion.

This means moving money from your IRA into a Roth account a little at a time, over several years, while you still have those wider married brackets to work with.

You pay some tax now, at today's lower married rates.

In return, that money grows tax free. 

And the survivor can pull from it later without adding to their taxable income.

Smaller IRAs down the road also mean smaller RMDs down the road.

That can soften the widow's penalty before it ever arrives.

No one likes paying taxes, but paying a little now can save your spouse from paying more later.

Converting an employer plan account or Traditional IRA to a Roth IRA is a taxable event. Increased taxable income from the Roth IRA conversion may have several consequences including but not limited to, a need for additional tax withholding or estimated tax payments, the loss of certain tax deductions and credits, and higher taxes on Social Security benefits and higher Medicare premiums. Be sure to consult with a qualified tax advisor before making any decisions regarding your IRA.