Surviving Spouse Taxation

I want to talk about surviving spouse taxation. Often folks come in, they’re married and they want to make sure that their loved ones are taken care of if something was to happen to them. Oftentimes that’s done with life insurance, investments, various different types of planning. But one of the areas that is often left behind is tax planning. Let’s walk through a scenario here of difference between the amount of income for a married couple filing jointly and then a surviving spouse filing singly. Let’s assume for this scenario we want to have $81K of total income. That’s going to come as their married and still living from two sources: an IRA of $36K gross distribution and each of their Social Security equaling $45K a year. For this scenario, let’s assume one is getting $30K, the other is getting $15K, okay? With those scenarios there, you remember you get a standard deduction for a joint in 2021 here of $27,800. Total tax then, total taxable income is going be $18,325. Therefore total Federal tax liability of $2,785, not too bad at $81K of gross income. One spouse passes away, it doesn’t matter who it is. We have a surviving spouse then filing a single tax return the following year. Let’s assume they still want to live on that same lifestyle, that same $81K. Remember, you lose the lower of your two Social Securities. So we just lost $15K of Social Security. Got to keep the higher of the $30K. But now we’re going to make up the difference with IRA distributions. Maybe they’re fortunate enough that they have an IRA to be able to do that. So $51K is what we need now out of that IRA to get to that $81K. Single deduction for a single individual $14,250 bringing our total taxable income to $62,250. A big jump from that joint return, right? Therefore Federal tax liability now $9,449, almost $9,500. Remember over here, joint couple almost $2,800, over there almost $9,500. Big difference for living on the exact same amount of income, only difference is one spouse passed away therefore filing a single return. If you’re somebody out there and you’re trying to make sure a loved one is taken care, don’t forget tax planning. Maybe there could have been things we could have done in advance with proper tax planning and income planning. Maybe there should have been accelerated income. Maybe there should have been Roth conversions. Maybe there could have been something else in place so we wouldn’t have this situation here where the surviving spouse is taxed with a significant tax bomb out there. Give us a call at the number on the screen. We’d love to sit down and help you plan to retire well and make sure your loved ones are taken care of.