The so-called marriage penalty is well known, but the more
obscure widow's penalty is just as bad if steps aren't taken to
How does it work? Just like a married couple may owe more
income tax than two singles, especially if their earnings are
equivalent, a widow (or widower) can end up paying more tax after
a spouse dies.
You can take steps to guard against these extra taxes that a
surviving spouse can end up owing. The penalty can be an added
burden for couples whether they are young, middle aged or
When one spouse dies, the survivor typically has similar or
only slightly less taxable income than the married couple had
reported. Yet the widow or widower generally files singly, rather
than on a joint return.
The result is a much higher tax rate. This year's increase in
tax rates, new surtaxes and new stealth taxes have made this
problem more pressing for high-income retirees.
For example, the 3.8% Medicare surtax on net investment income
kicks in at $250,000 of modified adjusted gross income for
couples filing jointly. The threshold for singles is
Say a married couple has reported $240,000 of MAGI, avoiding
the surtax. If the surviving spouse has $220,000 of MAGI, as a
single filer, she would likely owe the extra 3.8% on investment
You don't have to be at that income level to feel the added
tax bite. Suppose hypothetical Al and Ann Ball are retired, with
$70,000 in taxable income, after deductions. They're in the 15%
Then Al dies. Ann files singly, with $60,000 of taxable
income. Now she's in the 25% bracket. Taxes will take more of her
Advance planning can help. "One tactic is to convert
traditional IRAs to Roth IRAs," said Ed Slott, an IRA expert in
Rockville Centre, N.Y. After five years, Roth IRA withdrawals are
untaxed. You must be at least age 59-1/2.
If the Balls had converted their IRAs, Ann could tap her Roth
account tax-free after Al's death. So her higher tax bracket
wouldn't impact that source of cash flow. And her reduced taxable
income could hold down her tax rate.
But Roth IRA conversions trigger tax bills in the year they're
done. That can push you into a higher tax bracket. You might
avoid that by doing a series of yearly conversions instead of
converting an account all at once.
Say that a working couple have $200,000 of taxable income this
year. Their traditional IRA balances total $100,000. They're in
the 28% tax bracket, which goes up to $223,050. They could
convert $23,000 of their IRAs to Roths and stay in the 28% tax
bracket. They'd pay as much as $6,440 on that.
By doing similar conversions over a few years, such a couple
could convert most or all of their IRAs to tax-free Roths by the
time they retire. That would take the sting out of the future
Worried that unexpected income might lead to converting too
much? One solution is to convert most or all of your IRA to a
Roth this year. Once you prepare your 2013 tax return and know
your taxable income for the year, you can recharacterize (undo)
just enough of the conversion to leave you with an amount that
fills up your tax bracket.
Say you convert $100,000 of your IRA by year-end. You discover
your taxable income for 2013 is $200,050, without the Roth
conversion. Then you could recharacterize 80% of the conversion,
leaving you with $20,000 in taxable income to fill out your tax