Summary

The lost of a spouse in retirement can result in the following tax shock:

1. No longer able to file as Married Filing Jointly, may have to file as Single, the highest tax bracket.
2. Loose 50% of the Personal Exemptions.
3. Loose 50% of the Standard Deduction.
4. Loose 33% of dual Social Security benefits.
5. Possible loss of spouse’s private pension, depending on plan.
6. Higher tax bracket may raise the marginal tax rate.

As you get older and are either retired or are planning your retirement you will undoubtly work out a retirement plan that should also include a tax plan. Bad tax planning is almost as bad a bad retirement planning. There are major tax filing issues for those who become a widow(er), the loss of both a personal exemption and a 50% less standard deduction. After a death, you can bet that the survivors’ marginal tax rate will increase and you need to plan for this in your calculations.

First let’s look at what happens in the tax years after a spouse passes away;

• In the tax year of the passing, if you did not remarry by December 31^st, you can claim Married Filing Jointly, and your normal 2 exemptions. You may only do this one time.
• After the initial tax year, if you have a dependent child living in your house and your spouse died in one of the past two years you may qualify as a Qualified Widow(er).
• With the above dependent child or any qualified other dependant, after the 2^nd year , may qualify to file as Head of Household.
• With no dependent child, you immediately become Single status for tax purposes, the most expensive tax bracket there is.

Here is how it affects the Standard Deductions in 2014:

Filing Status

Single $6,200

Married Filing Jointly $12,400

Married Filing Separately $6,200

Head of Household $9,100

In addition for tax year 2014, the personal exemption amount is $3,950 per person, losing a spouse provides ½ the former exemption. Let’s also assume that both husband and wife were collecting Social Security, the passing of a spouse typically reduces the total annual Social Security amount by 33%.

When you do your retirement planning make sure you also look at tax planning for a surviving spouse and leave instructions behind on how best to deal with this issue.