Hidden Taxes Can Disproportionately Hurt Women

A married couple uses two exemptions worth $8,100 in 2016. The standard deduction for married couples is $12,600. So that’s total of $20,700 in right-off-the-top in tax protection. But when a spouse dies, generally the male, only one exemption remains and the standard deduction is cut is half, totaling $10,350. The exemptions are static: the question is should you use the standard deduction or itemized deductions? But for most seniors without a mortgage, the standard deduction is often the choice. And remember Medicare Part B premiums are based on taxable income. It is conceivable the Medicare Part B premiums could increase for the surviving spouse based increased taxable income. That’s the basic tax issue.

Here’s the revenue issue. Let’s cite and remove from the equation the tax-free revenue that’s not reportable income for the provisional income test for Social Security taxation: Roth IRA distributions, reverse mortgage equity loan income, cash-value life insurance policy loans and HSA withdrawals for approved medical expenses. All other income sources are includable for Social Security benefit tax calculations and are subject to income or capital gains tax. Keep in mind that tax-free muni bond income is includable in the Social Security benefit tax calculation and although highly unlikely, may also trigger the alternative minimum tax.

But the big revenue news here is the loss of the Social Security income for the surviving spouse, generally the lower of the two monthly benefit checks. So for the surviving spouse, the combination of losing part of their Social security income, eliminated exemption and half the standard deduction can have a negative financial impact.

Few financial planners understand this, much less plan for it, and the majority of the time, women have to live with the consequences. You should create a financial plan for the surviving spouse. It’s bad enough to lose your partner in life, but to add economic hardship for the survivor can really be hurtful.

You may have to generate a new source of income to replace the loss of Social Security if the couple’s budget was based on two Social Security incomes. A couple of income options that many survivors are unaware of: life insurance cash values and reverse mortgages. It’s surprising to find that most seniors with permanent life insurance have never considered its accumulating cash values. That cash could be distributed as a tax-free policy loan as long as the policy is kept in force for the life of the insured. Before moving with this idea contact a life insurance professional for guidance.

A reverse mortgage could be a tax-free income source that can generate lifetime revenue. Before moving forward with this idea contact a certified HECM loan officer for guidance.

These are just a couple of ideas that can be an alternative income resource for a surviving spouse. Remember always consult with a tax professional before moving forward with any of these ideas.