Can we talk about how taxes changed for you after a spouses' death?

[Jenna]

We are well on our way to retirement. Already achieved FI.

One theme that keeps coming up is that taxes eat up a bigger chunk after a spouse passes. So right now our income is a combination of a COLA pension+invested assets.

Upon my spouses death, I will get 60% of the COLA'd pension plus enough from life insurance to make up the difference. So the only thing to consider for taxes is.

1. One less deduction
2. medicare cliff

So even if I will be paying more taxes/medicare, my expenses will decrease.

We are all healthy, just trying to consider all scenarios. What am I missing?

[pacergal]

We also have a cola pensions, 100% survivor, don't withdraw from investments. Nice place to be and we feel blessed.
If one of us were to die today, the survivor would immediately be bumped up to the next tax level and third tier IRMAA
looking to the future, it looks like 32% tax and level 4 IRMAA, or higher, depending on RMDS on our investments.
Its a big jump.
We saved like crazy, and really didn't pay attention to our pension payout until a few years before retirement. Our savings are tax deferred, no Roths.
We are blessed, and if I am making the money, I will pay the taxes!

[MichaelB]

When my DF passed, DM got his Navy pension, a couple of very small annuities, and a small bump in SS. Total income fell but the tax hit was still pretty big, not from the loss of one deduction, but because now she files single instead of joint. She’s also now permanently in IRMAA-land.

The bigger challenge is aging alone at home. When she needed care there was no one to help or hire / supervise an aide. We did that remotely but it doesn’t work nearly as well when there is no day to day supervision, and she eventually moved into a senior care facility.

I think long term care insurance should be considered if there is no one nearby to help if one needs longer term help to stay at home.

[RunningBum]

The big hit comes for those who may not have a pension but rather have a large tax deferred account. Once you hit RMD age (now 72), you have to withdraw a certain amount, even though you may not need it to cover expenses. The RMD is the same whether you are single or married, but the tax is higher on single filers.

Sounds like you wouldn't be affected so much with 60% pension, but if you went first, your spouse would pay more taxes if they still get 100% of the pension.

[USGrant1962]

Quote:

Originally Posted by Jenna We are well on our way to retirement. Already achieved FI. One theme that keeps coming up is that taxes eat up a bigger chunk after a spouse passes. So right now our income is a combination of a COLA pension+invested assets. Upon my spouses death, I will get 60% of the COLA'd pension plus enough from life insurance to make up the difference. So the only thing to consider for taxes is. 1. One less deduction 2. medicare cliff So even if I will be paying more taxes/medicare, my expenses will decrease. We are all healthy, just trying to consider all scenarios. What am I missing?

As some have mentioned in passing, the big thing you are missing is going from joint filing to single filer. That alone can cause a substantial tax increase if you have average or better income.

[RobbieB]

Oh yeah, filing single vs married joint is a big hit.

[SecondCor521]

First it's good to look at how the income situation changes, which may be different for each spouse, as noted. For the various sources, income might go up, down, or stay the same.

Filing status from married to single (or very rarely qualifying widower or HOH) will hurt. Note that you can still file married in the last partial year of the first-to-die's life.

IRMAA surcharges will probably go up, and might go way up.

As a pedantic note, there are currently no personal deductions on the IRS tax forms. What does also change, which is sort of similar, is the standard deduction, which generally speaking most people use nowadays and generally speaking will be cut in half.

Another thing that might change are subtractions at the state level. In my state, certain types of pension and retirement income are subtracted out before tax brackets are applied. So if a person with that kind of income dies, the subtraction will go away as well.

I'd suggest sitting down with tax software and mocking up some returns as though each person has died and seeing what happens. You'd also have to look up the IRMAA charts to see how that would be affected since that's generally deducted from SS and isn't on the tax return.

As an aside, there are other expenses which may go up or down. To put it a bit bluntly, the deceased spouse will not require food, medical care, entertainment expenses, transportation expenses, or insurance.

I think someone else mentioned there may be increases like help around the house. I think there are cases in my Dad's retirement CCRC where two spouses can remain independent because they cover each other's deficits, but one spouse would have to move into assisted living or even memory care.

[TheWizard]

I'm single for the past few decades and always will be.
I'm in the 24% marginal tax bracket so I pay a decent amount of income tax, but I have a goodly amount of retirement income left over after tax as well.

People should look at how much $$$ they have left after paying income tax and stop worrying about the tax dollar amount.

Or the newly single person could donate $50k per year to charity, which could lower taxable income. Do it with QCDs from an IRA to lower your Medicare MAGI...

[RunningBum]

Quote:

Originally Posted by TheWizard People should look at how much $$$ they have left after paying income tax and stop worrying about the tax dollar amount.

The main value in looking at this, IMO, is as a factor in deciding whether and how much to do Roth conversions. At the very least, it seems like it should be a tiebreaker.

[donheff]

Sounds like widowers and widows should get together and form tax unions.

[Whisper66]

Corrected Case 2 with proper RMD values .....

Two examples showing the impact of federal taxes are shown here. I'm using 2020 fed tax rules.

Case 1 - Assume wife and I are 60 and have a yearly pension of $50,000 and investment dividends (assume all qualified) of $30,000. In 2020 I would pay about $2632 if married and about $8458 if single.

Case 2 - Let's now assume we just turned 72 yrs old and have had $500,000 for years sitting nicely untouched and untaxed in our traditional IRA account. At 72 yrs, Required Minimum Distributions (RMDs) are required. RMD means those assets sitting quietly unused and untaxed in our traditional IRA have to be pulled out a bit each year and taxed whether we need that money or not. Those RMD's would add another ~19,500 to our income making it $69,500. Assume we still have the $30,000 of qualified dividends. That would raise our taxes if married to $4972 or single to $12,858.

Can run your own numbers in seconds using online free tools.....for the above examples, I used:

Tax Estimator - https://cotaxaide.org/tools/Estimate...Worksheet.html
RMD Calculator - https://www.schwab.com/ira/understan...alculators/rmd

[Whisper66]

Here's a graph of the singles vs married federal tax brackets of 2020. I find I understand the impact better if I see the overall trend in graphs.

[Whisper66]

Quote:

Originally Posted by Jenna ..... Already achieved FI....... What am I missing?

Honestly as long as you invest conservatively, honestly consider expenses and are willing / able to control expenses (especially medical), I doubt you are missing anything really important. We just don't hear lots of cases where someone who has done those things, was comfortably FI, retired, had spouse pass and then ended up in financial disaster. I'm sure there are examples out there that readers can speak about. But, in general, I don't think it's all that common for folks who really achieved FI and are careful with their assets to get into much trouble later in life.

[TheWizard]

Quote:

Originally Posted by RunningBum The main value in looking at this, IMO, is as a factor in deciding whether and how much to do Roth conversions. At the very least, it seems like it should be a tiebreaker.

Yes, i would agree with that, but it's trickier due to the unknown year of the first demise.
In my case, as a single person, I'm doing Roth conversions until I start RMDs, at which point I'll stop doing them...

[gauss]

Although not strictly a tax issue, one of the big changes could be in Social Security benefits -- especially if the couple was a dual-earner with similar monthly benefits. Only the larger of the 2 benefits would carry on.

-gauss

[Sue J]

Quote:

Originally Posted by Whisper66 Case 2 - Let's now assume we just turned 72 yrs old and have had $500,000 for years sitting nicely untouched and untaxed in our traditional IRA account. At 72 yrs, Required Minimum Distributions (RMDs) are required. RMD means those assets sitting quietly unused and untaxed in our traditional IRA have to be pulled out a bit each year and taxed whether we need that money or not. Those RMD's would add another ~40,000 to our income making it $90,000. Assume we still have the $30,000 of qualified dividends. That would raise our taxes if married to $9712 or single to $17,368.

Would the RMD on a Traditional IRA of $500,000 really be $40,000? That seems very high.

[REWahoo]

Quote:

Originally Posted by Sue J Would the RMD on a Traditional IRA of $500,000 really be $40,000? That seems very high.

Here's a RMD calculator: https://www.schwab.wallst.com/Tools/...culator/public

[Whisper66]

Quote:

Originally Posted by Sue J Would the RMD on a Traditional IRA of $500,000 really be $40,000? That seems very high.

Good catch, I must have typed something in wrong. That's one reason I provide links to tools I use....lets other check for themselves with their own numbers. Thanks for catching. Correct answer should be ~$19,500 RMD.

I've corrected my prior post (hopefully!)

[Out of Steam]

We have a small 20 year mortgage. What I'm learning today is consider making prepayments to pay it off before the first of us is subject to RMD (13 years).

If one of us dies, we could do significantly worse than having already paid it off from retirement accounts in the 22% Federal tax bracket. Especially since we are very unlikely to be subject to IRMAA while we are both alive, but the survivor is almost certain to be.

[TheWizard]

Quote:

Originally Posted by Out of Steam We have a small 20 year mortgage. What I'm learning today is consider making prepayments to pay it off before the first of us is subject to RMD (13 years). If one of us dies, we could do significantly worse than having already paid it off from retirement accounts in the 22% Federal tax bracket. Especially since we are very unlikely to be subject to IRMAA while we are both alive, but the survivor is almost certain to be.

Paying some level of IRMAA is fine. This means you are in decently good shape financially, not in retirement poverty.
I've been paying IRMAA since starting Medicare six years ago and always will be...