One of the astir communal status taxation readying errors I spot is circumstantial to joined couples: not accounting for the taxation changes that volition hap erstwhile 1 of the 2 spouses dies.
For example, utilizing information from the SSA’s 2017 Period Life Table, we tin cipher that, for a male/female mates some presently property 60 and successful mean health, determination volition be, connected average, 11.3 years during which lone 1 spouse is inactive alive. (That is, the expected play for which some spouses volition inactive beryllium live is 17.4 years, portion the expected play for which either spouse volition beryllium live is 28.7 years. The quality betwixt those 2 lengths of time, 11.3 years, is fundamentally the expected duration of “widow(er)hood” for the couple.)
Why this is important for taxation planning
When 1 of the 2 spouses dies, determination is mostly a alteration successful income, but it’s typically somewhat humble arsenic a percent of the household’s wide income — particularly for retired couples who person managed to accumulate important assets.
What mostly happens is that the smaller of the 2 Social Security benefits disappears when 1 spouse dies*, but the portfolio income is mostly unchanged (unless the deceased spouse near a important information of the assets to parties different than the surviving spouse).
And opening successful the twelvemonth aft the death, the surviving spouse volition lone person fractional the modular deduction that the mates utilized to have. In addition, determination volition lone beryllium fractional arsenic overmuch country successful each taxation bracket (up to and done the 32% bracket), and galore assorted deductions/credits volition person phaseout ranges that use astatine a little level of income.
In different words, there’s fractional the modular deduction and fractional arsenic overmuch country successful each taxation bracket, but the surviving spouse is near with much than fractional arsenic overmuch income. The result: their marginal taxation complaint mostly increases comparative to the play of status during which some spouses were alive.
The taxation readying takeaway is that it’s often beneficial to displacement income from those aboriginal (higher marginal taxation rate) years guardant into earlier (lower marginal taxation rate) years. Most often that would beryllium done via Roth conversions oregon prioritizing spending via tax-deferred accounts.
It’s tricky of people because, arsenic with thing dealing with mortality, we don’t cognize the astir captious inputs. To enactment it successful taxation terms, however galore years of “married filing jointly” volition you person successful retirement? And however galore years of “single” volition you (or your spouse) person successful retirement? We don’t know. We tin usage mortality tables to calculated expected values for those figures, but your existent acquisition volition surely beryllium different.
So it’s hard (or rather, impossible) to beryllium precise with the math. But it’s precise apt that a) determination volition beryllium immoderate years during which lone 1 of you is inactive surviving and b) that 1 idiosyncratic volition person a higher marginal taxation complaint astatine that clip than you (as a couple) had earlier. So during years successful which some spouses are retired and inactive alive, it’s apt worthy shifting some income guardant to relationship for such.
Often the thought is to prime a peculiar threshold (e.g., “up to the top of the 12% taxation bracket” oregon “before Social Security starts to go taxable” oregon “before Medicare IRMAA kicks in”) and bash Roth conversions to enactment you somewhat beneath that threshold each year. But the specifics volition alteration from 1 household to another. And the determination needfully involves a important magnitude of guesswork arsenic to what the aboriginal holds.
*This is simply a simplification. There tin beryllium assorted factors (e.g., authorities pension) that would marque the full household Social Security payment autumn by an magnitude much oregon little than the smaller of the 2 idiosyncratic benefits.
Mike Piper is the writer of the “Oblivious Investor” blog, wherever this was archetypal published — “Retirement Tax Planning Error: Not Planning for Widow(er)hood“