Don’t Get Sucked into the Widow’s Tax Trap

If you are a married filing jointly (MFJ) taxpayer you will not be one indefinitely.  At some point, you or your spouse will be a single taxpayer and your tax situation will change dramatically.    Let’s go back to John and Judy. Their income is $100,000 which consists of John’s military pension and IRA distributions.   Now, let’s say John dies. Thankfully, he filed for a 55% Survivor Benefit Pension (SBP) when he separated from the military which allows Judy to receive a pension benefit of $30,250.  However, that’s not enough for Judy to live on.  She feels she needs a gross income of $75,000 to maintain her lifestyle.  So, the rest of her income will come from IRA distributions.  (In case you are wondering about Social Security, we’ll get into that later.  That’s where it really gets fun!) Anything jump out at you?   Judy has 33% less income yet pays 13% more in federal tax! How can this be?   On the next page you will see the tax tables for a single taxpayer in 2018.  Notice that a single taxpayer is in the 22% bracket when taxable income exceeds $38,700. A married couple must have income above $77,400 before they are in the 22% bracket.   The married couple also gets two standard deductions whereas a single taxpayer only gets one.    Higher Tax Rate + Less Standard Deduction = MUCH MORE TAX And there you have the Widow’s Tax Trap; Less income and more tax. Now, if Judy had Roth IRA distributions instead of Traditional IRA her tax bill would have only been $1,844!