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The Widow’s Surprise: Higher Income Taxes

Scott Burns

Question: A friend of mine, widowed last year, was shocked at how much more Federal income tax she must pay compared to when she and her husband were filing jointly. She assured me that her widowed friends all complain of the same thing. While I realized there is only one dependent deduction taken, surely the reduction of about 50 percent of one’s income would more than offset this.

Is this something we have to look forward to — higher taxes — as we lose our partners? —E.H., Georgetown, Texas

Answer: Yes, many widows see their tax bills increase when they start filing taxes as a single person. There are two main causes for this. The first is that a single taxpayer experiences higher tax rates at lower levels of income. A single filer pays 10 percent on the first $9,225 this year. Then they pay at a 15 percent rate on income between $9,225 and $37,451. And income over $37,451 is taxed at 25 percent up to $90,750.

On a joint return the income limits are mostly double. A couple pays at 10 percent on the first $18,450; at 15 percent on income between $18,451 and $74,900; and at 25 percent on income over $74,901 but less than $151,200.

At the same time, single filers get half the standard deduction ($6,300 instead of $12,600) and only one personal exemption instead of two ($4,000 instead of $8,000).

Suppose, for instance, a couple enjoys an income of $80,000 a year. They will pay about $8,000 in income taxes. Now suppose one dies and income declines to $60,000. What happens? The widow will have less in deductions and exemptions and will be in higher tax brackets at lower income. The widow, for instance, will pay at a 25 percent rate on some income. The couple is well below the 25 percent rate. So the widow will pay more taxes, about $8,200, on less income.

The only way around this is to lose at least half of your income as a couple. But if that happens, your standard of living will go down because the cost of living for a widow isn’t half of the cost of living for the couple. Basically, a couple has two advantages over a single person. First, a couple has a lower tax burden per dollar of income. Second, a couple can enjoy the same standard of living as a single person on less than twice the income. This is why being widowed often marks the beginning of financial difficulties.

Q: My daughter has been a teacher for more than twelve years. Is she allowed to open an IRA account without suffering any penalties when she retires? We are interested in either a traditional or Roth account and which would you suggest? — J.G., by email

A: Your daughter should be able to open and contribute to either a traditional IRA or a Roth IRA while working. This would have no effect on either the WEP (Windfall Elimination Provision) or GPO (Government Pension Offset), which can bedevil teachers in retirement or as widows.

If she contributes to a traditional IRA, every dollar contributed will be subtracted from her taxable income as a teacher so her current income tax will be reduced. Instead of paying income taxes now, she will pay them later, when she retires and starts to make withdrawals to support her retirement.

If she contributes to a Roth IRA she will have to pay taxes on that income first but it will grow tax-free and any later withdrawals will be tax-free. Which IRA to choose depends on her current tax bracket and the tax bracket she expects to have when she is retired. If she is in the 15 percent tax bracket, she will likely benefit from paying taxes today and avoiding tax tomorrow. So she should choose a Roth IRA.

This year, single taxpayers can have a taxable income up to $37,450 and be in the 15 percent tax bracket. With a standard deduction of $6,300 and a personal exemption of $4,000, she can have a gross income of $47,750 a year before she enters the 25 percent tax bracket.
