Introduction: Understanding the “Widow’s Tax”
00:00:00
Karmi Gutman: All right. Good afternoon, everyone. I just want to make sure everybody can hear me. Can everyone hear me okay? Thumbs up if you can. All right, excellent. Great stuff.
Good afternoon, everyone. My name is Karmi Gutman. I am the financial planner at the Retirement Management Office, which is a partnership with Keystone Law Firm and Lifestyle Planning. I’m excited to have everyone here today. We’re going to be talking about what happens to taxes when one spouse is gone.
It’s one of those topics that can sometimes be a little misleading. You may have heard terms such as the “widow’s tax” that everyone is afraid of. The goal of today is to acknowledge that while this is obviously something one should be aware of, it’s not something that happens to everyone. Through a case study, I’m hoping to show that it is simply something that must be planned for if it occurs.
00:05:53
Karmi Gutman: To explain very quickly: the widow’s tax isn’t an actual penalty tax you pay in response to someone passing away. What it essentially means is that if you were filing jointly and then one spouse passes away, but you have the same amount of income afterward, you no longer get the benefit of the married filing jointly tax brackets. This is where one could actually end up paying more in taxes.
The goal is to go through a case study together to see the situation before someone passes away and then what happens afterward. But before I do that, I need to make the lawyers happy. Essentially, anything we discuss today is purely educational. Nothing discussed here should be construed as investment, financial planning, tax, or legal advice. Please consult with your trusted professional before acting on anything we discuss in this webinar.
Case Study: Romeo and Juliet
00:07:02
Karmi Gutman: Now that we’ve made the lawyers happy, let’s dig into the case study. We have Romeo and Juliet. Romeo is age 74, and Juliet is 73. They file jointly with an adjusted gross income (AGI) of $150,000.
When we think about AGI, think of this as the total cash flow you’re bringing in. That can be from rental income, Social Security, dividends, IRAs, pensions, and annuities. This isn’t your “taxable income” yet, because that’s determined after deductions. However, most people’s AGI is very similar to what would be reported for IRMAA purposes—that “fun” surtax you pay on Medicare if you make over $212,000 filing jointly or $106,000 filing single.
In our case, both are taking Social Security. They both started at age 67, and collectively they collect a gross amount of $67,000. For simplicity, we’ll assume they are taking the standard deduction.
00:09:27
Karmi Gutman: Let’s see what comprises that $150,000 of cash flow. They have IRA distributions of $40,000, interest income of $3,000 from a savings account, and taxable pensions totaling $50,000. Lastly, they have their taxable Social Security. As you may know, depending on how high your income is, the maximum amount of your Social Security that can be taxed is 85%. In Romeo and Juliet’s situation, it was around 80%. All together, that’s $150,000 of cash flow.
Now, let’s look at how their taxes shake down in a 2025 tax year scenario.
Joint Filing vs. Single Filing
00:10:46
Karmi Gutman: (To the audience) I just want to make sure everyone can still hear me. Thumbs up? Awesome. If you have questions, look for the hand icon to raise your hand, or use the chat box on the right-hand side.
For 2025, the married filing jointly standard deduction is $31,500. Because they are both over 65, they get an additional standard deduction of $1,600 each ($3,200 total). Also, a new addition for those over 65 is a “senior deduction” of up to $6,000 per person, assuming your AGI is under $150,000.
After subtracting these deductions from their $150,000 income, their taxable income is $103,300. In our progressive tax system, their federal tax bill is $12,554, with $1,434 due to the state of Arizona. This is an effective tax rate of about 12%.
00:14:16
Karmi Gutman: Now, let’s look at what happens if Romeo passes away. This is a very hard time for Juliet, but we have to look at the numbers.
We’ll make a few realistic assumptions:
Pension: Juliet gets 50% of Romeo’s pension (a common survivor clause).
IRA: Juliet is an “eligible designated beneficiary,” so she can merge Romeo’s IRA into hers and take distributions over her life expectancy.
Social Security: She loses the smaller of the two Social Security checks. We’ll assume they were equal, so she loses $33,500 of income.
On paper, she is losing about $47,000 of income. However, she is now filing as “Single.”
00:17:04
Karmi Gutman: Because she is filing single, her standard deduction is cut in half to $15,750. She still gets her $1,600 senior addition, but because her income is now in a specific range, she may phase out of certain senior deductions.
When we add up the new cash flow and subtract the smaller single deductions, her taxable income is $78,468. Applying the single tax brackets, her federal bill is roughly $12,000 and state is $1,300.
Here is the kicker: Technically, for every dollar Juliet makes now, she is paying a 15.5% tax rate, whereas before it was 12%. On paper, her tax percentage went up. But when you look at the actual check she writes to the IRS, the balance due is almost the same because her total income dropped.
When the “Widow’s Tax” Actually Hits
00:21:05
Karmi Gutman: Side-by-side, the tax balance didn’t change much in this specific case because the income dropped along with the deductions. This is why the widow’s tax isn’t always the “boogeyman” people make it out to be.
However, if the income stays the same after a spouse passes—for instance, if there is a 100% pension survivor benefit and large RMDs—then it’s a no-brainer: she would be paying significantly more in taxes because she lost half of her deductions but kept all of the income.
00:25:39
Karmi Gutman: (Sharing screen) Let’s look at the software. On the left is the joint case; on the right is Juliet filing single.
If we adjust the pension so that Juliet keeps 100% of it, her income goes back up toward $120,000. Now, her federal tax jumps from $12,500 to $17,000. Her effective rate hits 17%. This is the true Widow’s Tax. When income stays high but the filing status changes to single, the tax bill spikes.
Q&A and Closing Thoughts
00:29:55
Karmi Gutman: I’ll pause for questions. Michelle, what can I answer for you?
Michelle Dexter: Hey, Karmi. Is there a possibility that the surviving spouse would have to take more money out of the IRA after the rollover, potentially increasing the tax bill further?
Karmi Gutman: Great question. The Required Minimum Distribution (RMD) depends on the balance on December 31st of the prior year. If the market does well, the RMD could be higher because you have a larger balance being divided by the life expectancy factor. Conversely, a much younger spouse might have a lower RMD because their life expectancy is longer. It’s very market-dependent.
00:32:43
Alexis Rico Cortes: I just want to plug our next webinars. We have “Intro to Wills and Trusts” with Francisco on February 27th at noon, and “Inheritance Protection” with Michelle Dexter on March 11th. I’ll drop those links in the chat.
Karmi Gutman: Thanks, Alexis. To wrap up, tax planning is very nuanced. If you’d like a second set of eyes on your situation, give us a ring at Keystone or Lifestyle Planning.
The widow’s tax is not the same for everyone. It comes down to your sources of income and how they adjust when a spouse passes. Focus on income planning and understanding your new reality. This webinar has been recorded and will be on our YouTube page once it clears compliance.
Thank you so much for joining us today!
Transcription ended after 00:37:40
