Taxes May Increase When Your Spouse Passes Away

Most people name their spouse as their primary beneficiary of their assets, including retirements plans such as IRAs and 401(k)s. However, many do not realize that they could end up paying more taxes after they become a widow or widower. How does that happen? The tax brackets for single tax filers and joint filers are different - there are tax advantages to being married in the U.S. As a newly single filer, you may be surprised to find yourself in a higher tax bracket.

Qualified retirement plans have required distributions (RMDs). Assuming the surviving spouse is the primary beneficiary of the deceased’s qualified plans, the most common primary beneficiary designation, not only has the surviving spouse suddenly become a single filer for tax purposes, but if the surviving spouse is age 70½ or older then (s)he cannot avoid RMDs, increasing his or her annual income. 

      *Owners of Roth IRAs do not have RMDs. 

For some people, losing a spouse could also impact their Social Security benefit in an unexpected way. Approximately 1/3 of all Social Security recipients have to pay income taxes on their benefits. So how does losing a spouse potentially increase taxation of benefits? RMDs are considered income. In some cases that additional income could trigger tax consequences on Social Security benefits. Why? According to the Social Security Administration, if you are filing as an individual and your income exceeds $34,000 (the threshold for 2015), up to 85% of your Social Security benefits may be subject to income tax.