Tax Considerations for Widows

As a widow, you may face unique financial and tax considerations. Unfortunately, there’s something called the widow’s penalty tax (or “widow’s tax penalty”) to be dealt with, as well. It’s best to prepare for tax season long before April, but these preparations can involve special rules that apply to your specific situation.

Fortunately, with careful planning and some experienced advice, the task doesn’t have to be overwhelming. In this post, we discuss how widows can maximize tax deductions while minimizing the stress often associated with preparing returns.

This article discusses these topics:

What is the correct filing status for you?
Understanding your spousal tax implications
What is the Widow’s tax penalty?
Take advantage of planning deductions

What Is the Correct Filing Status for You?

It is important to know your filing status when tax time comes around—the reason why isn’t simply to stay out of trouble. Changing your status can offer significant opportunities to save money by lowering your liability, and how much you’re assessed by the IRS as owing.

Assuming you have all the necessities to file for qualifying widow status, you can get special consideration for two years after your spouse’s passing (provided you haven’t remarried within this time). In other words, your return will be treated as though you were filing a joint tax return.

As a result, among other benefits, your deductions get counted as tax brackets. On the second anniversary of your loved one’s death, your tax status reverts to either “single” or, if you have any dependents, “head of the household.”

Qualifying Widow Status requires all of the following:

Your loved one died within the last two years.
You haven’t remarried.
You have a minor dependent (non-foster) child or stepchild living with you.
You are qualified to file a joint return with your spouse in the year of their passing.
You paid over half the expense to keep a home up for the year.

Understanding Tax Implications of Your Spouse’s Income

Being the widow of a hardworking spouse can be a blessing and a burden. In fact, for affluent women without children, filing taxes after losing a spouse can be an intimidating experience. Nevertheless, understanding the tax implications of taking sole responsibility for that income can offer relief that wasn’t previously available.

It’s rarely more evident than at times like these that life isn’t all about money. However, even the affluent must be cautious about inflation and market volatility’s wealth-draining effects today. For example, a million dollars may buy more today than tomorrow due to an inflationary reduction of your money’s purchasing power.

2022 was a challenging year for the stock and bond market as many retirees and retirees-to-be watched once-steady-income-producing investments lower in value.

Unfortunately, enjoying a comfortable lifestyle before your spouse passes away does not guarantee an equally luxurious retirement in the future. Half of the reason we’re encouraging you to begin analyzing and planning out your taxes is that doing so can be a powerful weapon for protecting wealth for yourself and your family.

This, in turn, can help nurture a degree of relief, if not peace of mind, when you know that you’ve planned to sufficiently pursue the lifestyle you envisioned for yourself and your family.

Think Long-Term When Investing. We Can Help.

What Is the Widow’s Tax penalty?

For the affluent, financial planning is an essential part of ensuring that your wealth can be passed down from generation to generation. One wealth transfer phenomenon can be a pitfall, however: the Widow’s Tax Penalty. This is essentially a tax rate placed on wealth that is transferred when your spouse dies.

Even for spouses who have planned for the future, outstanding medical bills from a late husband or wife can add to the impact of the Widow’s Tax Penalty when it comes time to settle the estate. With debts that need to be paid off and estate taxes due, your affluence can quickly decrease with surprising speed.

This is why your affluence should not be taken for granted. It often serves as an essential asset, helping widows manage any accrued medical costs when the worst happens. Reducing your taxable income is key.

Take Advantage of Deductions

Taking full advantage of the income tax deductions you are allowed can be a great way to protect your wealth. By strategically planning them out, you may be able to continue enjoying the lifestyle you are accustomed to.

Careful consideration should be given to the different types of deductions available and how they can potentially benefit your unique financial circumstances. Patience also factors in: The most successful tax planning, reducing your liability, is done over years or decades. This, potentially, is how you can save the most money possible.

Professional advice should also be sought to ensure optimal use of deductions and ensure that you don’t overpay. It’s not worth risking an audit, either, in an era in which the IRS makes no secret of singling out successful individuals. Your best results are far more likely due to working with a professional tax planner/advisor.

Minimize Tax Liabilities With a Financial Advisor

Reducing your tax liability through planned wealth management strategies is a must, especially for the financial well-being of a widow. By assessing your short and long-term financial goals—and then planning steps toward them, a financial advisor can help you better ensure that your wealth is well fortified for the economic future.

Relying on an experienced wealth manager typically means minimal paperwork and preparation each tax season and all year round. However, since anyone can call themselves a “financial advisor,” it is essential to be careful as you screen candidates. For example, look for financial advisors who are fiduciaries.

We don’t just say this because ViaWealth is a fiduciary firm: It’s important because it means that an advisor puts their clients’ best interests ahead of our own, at all times. Even were it to cost us money of our own, yours takes priority.

We are passionate about providing concierge financial services, including retirement planning and asset management, to independent, successful women. Contact us to learn how we can develop a tax planning strategy for your new normal.