Wendy Bennett

When is it possible that you’ll be penalized if you become widowed? Within the nuances of the Internal Revenue Code. Our federal tax code contains inherent tax penalties, called the Widow’s Tax Penalty, that can leave a surviving spouse worse off financially. Understanding that these pitfalls exist can better prepare you to take action to help keep widows and widowers financially stable.

During your senior years, both spouses are typically collecting Social Security. Upon the passing of one spouse, the smaller of these benefit checks will disappear and the larger one will remain.

In addition, if your household is receiving a pension, the default by law is that the surviving spouse who did not earn the pension will receive 50% of that amount unless other options were chosen upon retirement.

For these reasons, income to the surviving spouse is reduced, yet the surviving spouse often pays more taxes. Why? Because the remaining income hits higher tax brackets at a faster rate for a single taxpayer resulting in a larger portion of their income being subject to taxation. There are other factors at play as well.

Considering the fact that the majority of a household’s investments often lie within a traditional IRA or 401(k), and spouses tend to be the primary beneficiary of those assets, the surviving spouse will need to withdraw a required minimum distribution (RMD) each year once reaching the appropriate age.

Tax laws surrounding RMDs require that an increasing percentage of the nest egg be distributed each year, and these distributions could push the surviving spouse into increased marginal and effective tax brackets. There is yet another potential unforeseen penalty linked to the lower triggering income levels for single filers — the Medicare premium surtax, also known as IRMAA (income-related monthly adjustment amount). Once income hits certain levels, this surtax is triggered. The higher income, the higher this surtax.