This is the second installment in a four-part series covering a fictional character, “Mary,” and how our services at P&A can provide clarity during the loss of a spouse. The first installment is linked here. The fictional variables and information used throughout this series is for education purposes only.
A financial plan helps structure investments and cash flow during your lifetime, while an estate plan ensures assets are distributed according to one’s wishes at the end of life. For Mary, these plans were converging as she worked through settling her late husband, Joe’s estate, while redefining her own financial future.
At P&A, we help clients by developing, updating, and monitoring these plans over time. For a widow or widower, an immediate concern may be understanding their new tax situation and making sure there isn’t a disruption in cash flow needs.
Tackling Taxes
Within three months of losing her husband, Mary found herself setting up an appointment with a Certified Public Accountant (CPA). This would be the first time in 30 years that she was tackling taxes by herself or had engaged a tax professional for assistance as Joe had filed their tax returns for years.
The first step during tax season can be taking inventory or compiling tax forms. Mary had several sources of income to account for, including:
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- Cash rent from farmland
- Social Security benefits
- Retirement accounts – Joe had reached Required Minimum Distribution age, while Mary had not.
- After-tax investment accounts
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Filing Status & Tax Implications
Since Joe passed away early in January, Mary was eligible to file as Married Filing Jointly for another year, which offers a higher income threshold and higher standard deduction amount. However, in the next tax year she would be required to file as a Single Filer, which could result in:
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- A higher tax bracket due to a lower threshold for single filers
- A smaller standard deduction
- Potential changes to capitals gains and investment taxation
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This is often referred to as the “widow’s penalty” as the surviving spouse may experience a reduction in income or financial benefits, but an increase in tax rate after their partner passes away.
Planning Options
While Mary was adjusting to her new reality, there were several planning strategies to consider in the current year before transitioning to a single filer status next year:
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- Roth IRA conversion to fill up a lower tax bracket
- Realizing capital gains at a lower rate before the filing status change
- Withdrawals from non-qualified annuities to fill up lower bracket
- Bunching charitable donations to maximize deduction in the current year
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At P&A, we helped Mary by developing a financial plan using our first meeting’s inventory with some additional conversation around her lifestyle needs over the last few years. Looking backward helps us project her cash flow going forward. We also reviewed her previous year’s tax return to analyze the various planning strategies above.
Planning for Years Ahead
Mary’s first tax season alone will be a learning experience, and with guidance from financial and tax professionals, she can make informed decisions to protect her financial future. Proactive tax planning can help widows and widowers maximize income and minimize taxes as they transition into the next chapter of life.
Disclosure: This blog is for informational purposes only and does not constitute individualized financial, tax, or legal advice. The scenarios described are fictional and for illustrative purposes only. Investment decisions should be made based on your unique financial situation, objectives, and needs. Past performance is not indicative of future results. For personalized advice, consult a financial advisor or tax professional.
Stay tuned for part three of this series, where we’ll explore the next step in Mary’s journey.
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Pittenger & Anderson, Inc. does not provide tax, legal, or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. You should consult your own tax, legal, and accounting advisors before engaging in any transaction. Additionally, the information presented here is not intended to be a recommendation to buy or sell any specific security. To learn more about our firm and investment approach, check out our Form ADV.
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