Widow’s Tax Penalty and Estate Planning

  • Elder Law
  • Estate Planning
Widow's Tax Penalty and Estate Planning

The U.S. tax code treats single taxpayers differently than married couples who file joint tax returns. This single filer penalty doesn’t just apply to young taxpayers, it also applies to older taxpayers and widows and widowers. And statistically, in most cases, it will be the husband who dies first, which is why it is nicknamed the Widow’s Tax. The Widow’s Tax can increase your taxes when your income is decreasing.

What Is The Widow’s Tax Penalty?

When one spouse dies, the retirement income for the remaining income often decreases – but the taxes often remain the same:

• There is a loss of social security income and the remaining income moves to a higher tax bracket. Up to 85% of social security is taxable when provisional income is above $44,000 for a couple, but $34,000 for a surviving spouse.

• After one spouse dies, the surviving spouse’s tax status changes to single. A married filing jointly tax status is the most beneficial status while the single filing status is unfavorable. A surviving spouse is allowed to use the married filing jointly tax status for the year in which the other spouse died.

• The Medicare premium surtax changes with the person’s marital status. A single taxpayer with the same income as a married couple will pay twice the Medicare surtax as the couple. If one spouse dies and the surviving spouse’s income does not change, their surtax will increase.

The Widow’s Tax penalty describes these situations when the surviving spouse has to pay more in taxes than the couple paid together.

Careful Estate Planning Can Reduce the Widow’s Tax

Married couples need to plan for a future after one spouse is gone. An experienced estate planning attorney can help them with strategies that will protect their assets and minimize their taxes.

Life Insurance Trust
An Irrevocable Life Insurance Trust (ILIT) in Illinois protects your estate from taxes so you protect your loved ones after you are gone. You must contribute funds to the trust each year to pay the life insurance premiums. These life insurance funds can provide income for a surviving spouse, children, and any other beneficiaries

SLAT Trust
A Spousal Limited Access Trust (SLAT) is an irrevocable trust that a person, called the grantor, can set up to protect their spouse. SLATS are easy to set up and are very flexible, and are a type of gift trust that is often used to keep assets in the family.

Medicare Planning
If you need long-term care, you want to protect your spouse and not spend all your assets on a nursing home and leave your spouse destitute.  A Medicaid Asset Protect Trust, or Medicaid Trust, is a type of irrevocable trust that protects a Medicaid applicant’s assets from being counted for eligibility purposes. Someone’s assets that exceed the Illinois eligibility limit can be protected in a trust instead of “spending down” their assets.

DuPage County Asset Protection and Trusts Attorney

If you have questions about asset protection and trusts or any other estate planning topics, please contact us to schedule a free consultation. To learn how a trusts lawyer could help, call us for a consultation at 630-864-5835.

We provide legal services in Cook, DuPage, Kane, Lake, and Will counties.