The Hidden Tax and Income Loss Disproportionately Hurt Women

A married couple uses two exemptions worth $8,100. 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 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 to subject to 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 tax. Keep in mind, that depending upon the issuing municipality; 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 loss of part of their Social security income, eliminated exemption and half the standard deduction can greatly reduce net after household income.

Few financial planners understand this, much less plan for it, and the majority of the time, women have to live with the consequences.