Because of women's longer average lifespans and likelihood of widowhood, most discussions about women's retirement planning tend to focus on the financial risks of aging alone and the fact that single women over the age of 65 are more likely to be poor than men of the same age.
But for many advisory clients, the opposite is true. Widowhood can result in the inheritance of substantial assets from a deceased spouse. And without proper planning, surviving spouses may be shocked by a big increase in their income taxes and Medicare premiums as their tax-filing status moves from married filing jointly to single.
There are 20 million widows in the United States and 1.4 million new widows each year, according to a recent Merrill Lynch study on widowhood conducted in partnership with Age Wave, a research organization that studies the impact of aging on business and society. Two in three married women become widowed at or after age 65, according to the report.
More than half of the widows in the survey said that they and their spouse did not have a plan for what would happen if one of them passed away. Only 14% of widows reported making financial decisions by themselves before their spouse died. Now, 86% report having to make those decision alone.
Many of them need help. Nearly 40% of widows in the survey said widowhood prompted them to hire a financial adviser. The Merrill Lynch/Age Wave survey was conducted in February 2018 and included more than 3,300 respondents, including 2,638 widows and 741 married, never-widowed respondents.
Although half of all widows in the survey experienced a decline in household income after the death of their spouse, many received inherited assets and income including their late spouse's 401(k), life insurance, and survivor benefits from Social Security and their spouse's pension, according to the survey.
In the years following the death of a spouse, widows may encounter some nasty financial surprises at tax time.
In the year of their spouse's death, a widow is considered married for the whole year and can file income taxes as married filing jointly. Because of the new tax law, the standard deduction for married couples in 2018 nearly doubled to $24,000 and in couples where both spouses are 65 or older, the standard deduction is now $26,600. That means fewer taxpayers will be able to itemize their deductions, including charitable contributions.
The following year, a widow must file taxes as a single person. The standard deduction for a single individual in 2018 is $12,000 with an additional $1,600 for those people age 65 or older. New tax rates have not yet been announced for 2019.
Newly single widows may find more of their Social Security benefits are subject to tax than when they were married. If a widow's combined income, defined as her adjusted gross income from her 1040 tax return, half of her Social Security benefits and any tax-free interest from municipal bonds exceeds $25,000, up to 85% of her Social Security benefits may be subject to federal income taxes at her ordinary tax rates. For married couples, the threshold for taxing Social Security benefits begins at $32,000 of combined income.
Higher-income widows may also find themselves paying more for Medicare than when they were married. Most retirees pay the standard monthly premium of $134 per month in 2018 for Medicare Part B, which covers outpatient services and doctors' fees. But married couples whose modified adjusted gross income (MAGI) exceeds $170,000 pay a high-income surcharge each month for both their Medicare Part B premiums and Medicare Part D prescription drug plans. Medicare premiums are based on the latest available tax returns, so 2018 premiums are based on 2016 tax returns filed in 2017.
While a couple's joint income may be below the $170,000 Medicare high-income surcharge threshold, officially known as an income-related monthly adjustment amount or IRMAA, it is conceivable that a widow's income could easily exceed the $85,000 threshold for single individuals.
If her income breaches that limit by just $1, she would find herself in the next IRMAA tier, paying an extra $53.50 per month for Medicare Part B boosting her combined premium and surcharge $187.50 per month. The IRMAA surcharges increase with income, rising to a combined premium and surcharge of $428.60 per month for Medicare Part B in 2018 for individuals with modified adjusted gross income of $160,000 or more. IRMAA surcharges have not yet been announced for 2019.
Following the death of a spouse, widows can appeal an IRMAA surcharge on a one-time basis. But if their income continues to exceed the $85,000 threshold for individuals in subsequent years, they could be on the hook for higher Medicare premiums for the rest of their lives.
Widows who sell the primary residence they shared with their spouse can exclude up to $500,000 of the long-term capital gain if they sell the property no more than two years after the death of their spouse. If they sell after that, the capital gain exclusion drops to $250,000.