Ask an Advisor: How Can My Tax Rates End Up Higher in Retirement?

The ‘Widow(er)’ Tax

The widow(er) tax is an oft-overlooked tax rate increase that affects married couples when the first spouse dies. In retirement, the death of a spouse often doesn’t result in a significant reduction in income. But the surviving spouse’s retirement income is now subject to the “single” tax bracket, instead of the much preferred “married filing jointly” bracket.

For a couple with $50,000 in taxable income in retirement, this could increase taxes each year by close to $1,000. For a couple with $100,000 in income, the tax increase would be closer to $5,000. (A financial advisor can help you navigate financial changes that may affect your tax situation.)

Large One-Time Expenses

A retiree may plan to take their pre-tax distributions evenly over time, but life rarely goes exactly as planned. People might pay higher taxes in retirement during years when large distributions have to be taken from a pre-tax account to cover one-time expenses. Hopefully, that distribution is for something fun like an RV or a trip with grandkids, but it might be needed to pay for a new roof or long-term care. In either case, taking a lump sum distribution will drive up your income tax bill and IRMAA for that year.

Tax Code Changes

The tax code is written in pencil. While some provisions of the tax code seem less popular to adjust, none of it is set in stone. We already know that tax rates are scheduled to go up in 2026 after the expiration of the Tax Cuts and Jobs Act (TCJA) so it’s a matter of “when” and not “if.” Historically speaking, tax rates are at all-time lows so it’s also understandable that taxpayers expect further changes to be made to the tax brackets in the coming years.

Some will downplay the impact of the TCJA rate expiration because the changes are only three to four percentage points. But for some brackets that translates to a 25% increase in the taxes you pay. For example, the 12% tax bracket will move to 15% (for married couples filing jointly, this applies to income up to $89,450). That means that your taxes overnight would increase by over $2,000 from that one bracket alone. (And, if you need more help planning for potential tax rate increases, consider speaking with a financial advisor.)

Legacy Planning

When it comes to tax planning we have to consider more than just the lifetime of the taxpayer. Pre-tax money that is passed on to heirs will still be subject to income taxes at some point in the future. If that inheritance takes place during the beneficiary’s peak earning years it could create a significant increase in taxes compared to what the original taxpayer would have paid even without any of the other factors being applicable.

Understanding what a person might pay in taxes now versus the future will have a big impact on whether specific tax planning strategies should be pursued. Any strategies that intentionally change the timing of income, whether that’s accelerating income through Roth conversions or capital gains harvesting, or accelerating deductions through tax-efficient charitable giving, need to be viewed through the lens of how tax rates might change over time. While these strategies may create new financial flexibility for the future, they may trigger higher taxes in a given year of retirement. (And, if you need more help with your financial plan, consider matching with a financial advisor.)

Bottom Line

The idea that taxes will go down for everyone in retirement is a common myth that unfortunately leads to inaction on tax planning. The best way to avoid skyrocketing taxes in retirement is to have a proactive and intentional plan specific to your individual situation. Tax planning is about consistent action over time, not a one-time major event. Small hinges will swing big doors when it comes to reducing a person’s retirement tax bill.

Tips for Finding a Financial Advisor

• Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.

• Consider a few advisors before settling on one. It’s important to make sure you find someone you trust to manage your money. As you consider your options, these are the questions you should ask an advisor to ensure you make the right choice.

• Keep an emergency fund on hand in case you run into unexpected expenses. An emergency fund should be liquid — in an account that isn’t at risk of significant fluctuation like the stock market. The tradeoff is that the value of liquid cash can be eroded by inflation. But a high-interest account allows you to earn compound interest. Compare savings accounts from these banks.

• Are you a financial advisor looking to grow your business? SmartAsset AMP helps advisors connect with leads and offers marketing automation solutions so you can spend more time making conversions. Learn more about SmartAsset AMP.

Steven Jarvis, CPA, is a SmartAsset financial planning columnist and answers reader questions on personal finance and tax topics. Got a question you’d like answered? Email AskAnAdvisor@smartasset.com and your question may be answered in a future column.

Please note that Steven is not a participant in the SmartAsset AMP platform, nor is he an employee of SmartAsset, and he has been compensated for this article. Taxpayer resources from the author can be found at retirementtaxpodcast.com. Financial Advisor resources from the author are available at retirementtaxservices.com.

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