By Attorney Gary Allen

Why do many widows and widowers pay more income tax even though their income has been reduced?

Most people understand that losing a spouse brings enormous emotional challenges. What many do not realize is that it can also trigger a series of unexpected tax increases.

In my experience, surviving spouses are often surprised to learn that even though household income has gone down, their tax burden may actually go up. This phenomenon is so common that financial advisors sometimes refer to it as the “widow’s penalty.”

Here are several reasons why that happens.

Filing Status Changes

For the year in which a spouse dies, the surviving spouse can generally still file a joint income tax return. After that, however, the surviving spouse will usually file as a single taxpayer.

At first glance, that may not seem like a major change. Unfortunately, many tax benefits available to married couples become smaller once a surviving spouse begins filing as a single individual.

The Standard Deduction May Be Reduced

Married couples filing jointly receive a larger standard deduction than single taxpayers.

As a result, when a surviving spouse begins filing as a single taxpayer, more of his or her income may become subject to taxation. The reduction in available deductions can produce a larger tax bill even if overall income has declined.

Loss of One Senior Deduction

Current federal tax law provides an additional deduction for taxpayers who are age 65 or older.

When both spouses are over age 65, a married couple may qualify for two such deductions. After the death of one spouse, one of those deductions disappears.

Although this may not seem significant at first, it is another example of how deductions are reduced precisely when many surviving spouses are adjusting to a lower income.

Pension Income May Decline

Many pension plans offer a reduced survivor benefit after the death of the employee or retiree.

As a result, a surviving spouse may receive a smaller monthly pension payment than the couple received while both were living.

This can create a double challenge: less income coming in while taxes become less favorable.

The Home Sale Exclusion May Be Cut in Half

Many married couples are aware that they can often exclude up to $500,000 of gain when selling their principal residence.

What is less well known is that a surviving spouse who waits too long to sell the home may eventually lose the ability to claim the full exclusion. In many situations, the available exclusion is reduced to $250,000.

For families who have lived in the same home for decades and have seen substantial appreciation in value, this change can result in a significant tax cost.

Understanding the “Widow’s Penalty”

The term “widow’s penalty” refers to the unfortunate reality that many surviving spouses pay taxes at higher rates despite having less income.

The reason is simple. After a spouse dies, the surviving spouse generally moves from the tax brackets applicable to married couples into the narrower tax brackets that apply to single taxpayers. At the same time, deductions and tax benefits often become smaller.

The result is that a surviving spouse may find that a larger percentage of income is being paid in taxes, even though the household’s overall financial resources have decreased.

Planning Can Make a Difference

The good news is that these issues can often be anticipated and managed.

A review of income taxes, retirement accounts, beneficiary designations, and long-term financial goals during the first year or two after the death of a spouse can help identify planning opportunities and avoid costly surprises.

The loss of a spouse is difficult enough. Understanding the financial changes that accompany that loss can help surviving spouses make informed decisions and preserve more of the assets they have worked a lifetime to accumulate.