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Multiple elderly women outlive their spouses and cannot anticipate encountering elevated taxes in the future following a loss. Nonetheless, financial specialists propose some methods to get ready.
As per statistics from the Centers for Disease Control and Prevention, the life expectancy of American women exceeds that of men significantly. In 2021, the life expectancy at birth for males was 73.5 years, while for females it was 79.3 years.
Consequently, numerous married women find themselves confronting a “survivor’s penalty,” resulting in increased taxes ahead, as stated by certified financial planner Edward Justrem, who serves as the chief planning officer of Heritage Financial Services in Westwood, Massachusetts.
Delve into more coverage in CNBC’s Women & Wealth special report, where we delve into approaches women can enhance income, save, and maximize opportunities.
Tax Implications Could Prove Detrimental for Widows
In the year in which a spouse passes away, the surviving partner may opt for the “married filing jointly” status when filing taxes for that fiscal year. It is essential not to enter into another marriage before the conclusion of the year.
Subsequently, many older survivors file taxes independently with a “single” filing status, which may result in higher marginal tax rates owing to the reduced standard deduction and tax brackets based on their circumstances.
For 2023, the standard deduction for married couples is $27,700, while single filers can only claim $13,850. (Rates use “taxable income,” derived by deducting the greater of the standard or itemized deductions from your adjusted gross income.)
Elevated taxes could represent the most substantial challenge for widows — and the situation could exacerbate following the expiration of the individual tax provision from former President Donald Trump’s landmark law, advised George, CFP and founder of Coromandel Wealth Management in Lexington, Massachusetts, Gagliardi.
Before 2018, the individual brackets stood at 10%, 15%, 25%, 28%, 33%, 35%, and 39.6%. By 2025, five of these brackets are lower, standing at 10%, 12%, 22%, 24%, 32%, 35%, and 37%.
Typically, the surviving spouse inherits the deceased spouse’s individual retirement accounts, and the so-called required minimum distributions remain approximately unchanged. However, the surviving spouse is now confronted with a higher tax bracket, as highlighted by Gagliardi.
“The larger the IRA, the bigger the tax problem,” he conveyed.
Contemplate Partial Roth Conversions
Experts suggest that some surviving spouses might encounter elevated taxes in the future, but it is crucial to conduct tax estimating before altering financial planning.
Spouses may contemplate partial Roth IRA conversions, which involve transferring a portion of pretax or non-deductible IRA funds to a Roth IRA to enable tax-free growth in the future, detailed Jestrem.
It is often more favorable to carry out this process over several years to minimize the total taxes paid for Roth conversions.
Founder of Coromandel Wealth Management
The couple will need to settle upfront taxes on the converted amount, but they can generate savings through more advantageous tax rates. “It is often more favorable to carry out this process over several years to minimize the total taxes paid for Roth conversions,” noted Gagliardi.
Reviewing Investment Accounts
Maintaining updated account ownership and beneficiaries is consistently crucial, highlighted Justrem, and neglecting to plan could prove costly for the surviving spouse.
Typically, investors realize capital gains based on the variance between the asset’s sale price and the original cost, known as the “basis.” However, when a spouse inherits property, they obtain a “stepped-up basis,” signifying that the property’s value at the date of death becomes the new basis.
Failing to capitalize on this opportunity could lead to higher capital gains taxes for the survivor.
Chief Planning Officer at Heritage Financial Services
Hence, it is vital to ascertain which spouse owns each asset, especially investments that may have “extremely appreciated,” according to Justrem. “Failing to capitalize on this opportunity could lead to higher capital gains taxes for the survivor,” he underlined.
Evaluating Non-Spousal Beneficiaries for IRAs
Gagliardi proposed that if the surviving spouse anticipates having adequate savings and income for the remainder of their life, the couple might also contemplate non-spousal beneficiaries, such as children or grandchildren, for a tax-deferred IRA.
“If planned correctly, it can reduce the total taxes paid on IRA distributions,” he stated. Nevertheless, non-spouse beneficiaries need to be familiar with the withdrawal regulations for inherited IRAs.
Prior to the SECURE Act of 2019, heirs could gradually “step up” IRA withdrawals throughout their lifetime, consequently diminishing tax liability annually. However, due to changes in the required minimum distribution regulations, the timeframes for certain heirs have now been abbreviated.