Women who are beneficiaries of their
late husbands' estates could be shocked at how much more they owe in taxes
Because of women's
longer average lifespans and likelihood of widowhood, most discussions about
women's retirement planning tend to focus on the financial risks of aging alone
and the fact that single women over the age of 65 are more likely to be poor
than men of the same age.
But for many advisory
clients, the opposite is true. Widowhood can result in the inheritance of
substantial assets from a deceased spouse. And without proper planning,
surviving spouses may be shocked by a big increase in their income taxes and
Medicare premiums as their tax-filing status moves from married filing jointly
to single.
There are 20
million widows in the United States and 1.4 million new widows each year,
according to a recent Merrill Lynch study on widowhood
conducted in partnership with Age Wave, a research organization that studies
the impact of aging on business and society. Two in three married women become
widowed at or after age 65, according to the report.
More than half of
the widows in the survey said that they and their spouse did not have a plan
for what would happen if one of them passed away. Only 14% of widows reported
making financial decisions by themselves before their spouse died. Now, 86%
report having to make those decision alone.
Many of them need
help. Nearly 40% of widows in the survey said widowhood prompted them to hire a
financial adviser. The Merrill Lynch/Age Wave survey was conducted in February
2018 and included more than 3,300 respondents, including 2,638 widows and 741
married, never-widowed respondents.
Although half of
all widows in the survey experienced a decline in household income after the
death of their spouse, many received inherited assets and income including
their late spouse's 401(k), life insurance, and survivor benefits from Social
Security and their spouse's pension, according to the
survey.
In the years
following the death of a spouse, widows may encounter some nasty financial
surprises at tax time.
In the year of
their spouse's death, a widow is considered married for the whole year and can
file income taxes as married filing jointly. Because of the new tax law, the
standard deduction for married couples in 2018 nearly doubled to $24,000 and in
couples where both spouses are 65 or older, the standard deduction is now
$26,600. That means fewer taxpayers will be able to itemize their deductions,
including charitable contributions.
The following year,
a widow must file taxes as a single person. The standard deduction for a single
individual in 2018 is $12,000 with an additional $1,600 for those people age 65
or older. New tax rates have not yet been announced for 2019.
Newly single widows
may find more of their Social Security benefits are subject to tax than when
they were married. If a widow's combined income, defined as her adjusted gross
income from her 1040 tax return, half of her Social Security benefits and any
tax-free interest from municipal bonds exceeds $25,000, up to 85% of her Social
Security benefits may be subject to federal income taxes at her ordinary tax
rates. For married couples, the threshold for taxing Social Security benefits
begins at $32,000 of combined income.
Higher-income
widows may also find themselves paying more for Medicare than when they were
married. Most retirees pay the standard monthly premium of $134 per month in
2018 for Medicare Part B, which covers outpatient services and doctors' fees.
But married couples whose modified adjusted gross income (MAGI) exceeds
$170,000 pay a high-income surcharge each month for both their Medicare Part B
premiums and Medicare Part D prescription drug plans. Medicare premiums are
based on the latest available tax returns, so 2018 premiums are based on 2016
tax returns filed in 2017.
While a couple's
joint income may be below the $170,000 Medicare high-income surcharge
threshold, officially known as an income-related monthly adjustment amount or
IRMAA, it is conceivable that a widow's income could easily exceed the $85,000
threshold for single individuals.
If her income breaches
that limit by just $1, she would find herself in the next IRMAA tier, paying an
extra $53.50 per month for Medicare Part B boosting her combined premium and
surcharge $187.50 per month. The IRMAA surcharges increase with income, rising
to a combined premium and surcharge of $428.60 per month for Medicare Part B in
2018 for individuals with modified adjusted gross income of $160,000 or more.
IRMAA surcharges have not yet been announced for 2019.
Following the death
of a spouse, widows can appeal an IRMAA surcharge on a one-time basis. But if
their income continues to exceed the $85,000 threshold for individuals in
subsequent years, they could be on the hook for higher Medicare premiums for
the rest of their lives.
Widows who sell the
primary residence they shared with their spouse can exclude up to $500,000 of
the long-term capital gain if they sell the property no more than two years
after the death of their spouse. If they sell after that, the capital gain
exclusion drops to $250,000.
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