The Widow Tax Hit: Much Ado About Nothing?

13 Pages Posted: 2 Aug 2021 Last revised: 12 Aug 2021

See all articles by Edward F. McQuarrie

Edward F. McQuarrie

Santa Clara University - Leavey School of Business

Date Written: August 12, 2021

Abstract

The widow tax hit ranks high among the fear appeals used by financial advisors to motivate client behavior. The pitch exploits the fact that tax brackets for singles may be only half as large as for married filing joint. Cognitive errors catalogued in behavioral finance, such as the availability heuristic, explain why retired couples can be made to worry about the tax rate the widowed survivor will have to pay, leading to the fear that it may be significantly higher and require a cutback in living standards. This paper is designed to allay that fear and immunize the retiree against sales pitches that manipulate it. The paper demonstrates that for affluent couples taking social security and Medicare, the tax hit from the survivor entering the single brackets is likely to be inconsequential, once necessary reductions in expenditure are taken into account. By contrast, loss of income, as when one social security payment disappears, may indeed threaten living standards, and the paper briefly examines potential solutions ranging from Roth conversions to life insurance. [This version contains minor updates and corrections.]

Keywords: widow tax, tax planning, behavioral finance, IRMAA, tax torpedo

JEL Classification: D14, G02

Suggested Citation

McQuarrie, Edward F., The Widow Tax Hit: Much Ado About Nothing? (August 12, 2021). Available at SSRN: https://ssrn.com/abstract=3896672 or http://dx.doi.org/10.2139/ssrn.3896672

Edward F. McQuarrie (Contact Author)

Santa Clara University - Leavey School of Business ( email )

500 El Camino Real
Santa Clara, CA California 95053
United States

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