Taxes Can Sink the Retirement Dreamboat of Many a Widow

It is estimated 7 out of 8 husbands precede their wives in death. The financial consequences for the surviving spouse can be devastating and difficult to recover from. Few financial advisors, much less retirement experts, actually have strategies set in place to defend mom when she needs it most. Watch the interview with economist, best-selling author and Registered Investment Advisor who holds a Master of Science in financial services, Dan Casey.

A married couple uses two exemptions worth $8,100. The standard deduction for married couples is $12,600. So that’s total of $20,700 in right-off-the-top in tax protection. But when a spouse dies, generally the male, only one exemption remains and the standard is cut is half, totaling $10,350. The exemptions are static: the question is should you use the standard deduction or itemized deductions? But for most seniors without a mortgage, the standard deduction is often the choice. And remember Medicare Part B premiums are based on taxable income. It is conceivable the Medicare Part B premiums could increase for the surviving spouse based increased taxable income. That’s the basic tax issue.

Here’s the revenue issue. Let’s cite and remove from the equation the tax-free revenue that’s not reportable income to subject to the provisional income test for Social Security taxation: Roth IRA distributions, reverse mortgage equity loan income, cash-value life insurance policy loans and HSA withdrawals for approved medical expenses. All other income sources are includable for Social Security benefit tax calculations and are subject to income tax. Keep in mind, that depending upon the issuing municipality; tax-free muni bond income is includable in the Social Security benefit tax calculation and although highly unlikely, may also trigger the alternative minimum tax.

But the big revenue news here is the loss of the Social Security income for the surviving spouse, generally the lower of the two monthly benefit checks. So for the surviving spouse, the combination of loss of part of their Social security income, eliminated exemption and half the standard deduction can greatly reduce net after household income.

Few financial planners understand this, much less plan for it, and the majority of the time, women have to live with the consequences.

Syndicated financial columnist Steve Savant interviews economist, best selling author, Registered Investment Adviser and Masters of Science in financial services Dan Casey. Right on the Money Show is an hour long financial talk distributed to 280 media outlets, social media networks and financial industry portals.