W.I.T. #44 - Tax Planning After the Loss of a Spouse

In this episode of What I'm Thinking I discuss potential tax planning strategies after a divorce or death of a spouse to compensate for the change in filing status.

Three Things Worth Sharing

IMF Economic Forecast Changes – In October the International Monetary Fund decreased its worldwide economic growth projection for 2024 from 3% to 2.9%...but increased its 2024 projection for the U.S from the 1% it published in July to 1.5%.  For those of you keeping score at home, the revised prediction is 50% different than what the IMF forecasted just three months ago.

NYC Bodegas – Last month my family and I traveled to New York City for the first time to visit my niece, who recently moved to Queens; that might be why this article about the small corner shops that run NYC caught my eye.

Deer Camp – As we are halfway through the 2023 deer season, here is a great look at historical pictures of Wisconsin deer camps & hunting published in the Milwaukee Journal Sentinel & its predecessors over the past 100+ years.

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VIDEO TRANSCRIPT

John Scherer: What are the tax consequences of losing a spouse? That's what I'm thinking about.  So as we're in the fourth quarter of the year, a lot of our work revolves around tax planning for our clients. And unfortunately this year we've had some clients and family members of clients who have lost their spouses.

And it has me thinking about the change that happens from a tax standpoint when that occurs. What happens with it is that in the year when somebody loses a spouse that year, they get to file married filing jointly, the same as if their spouse were still alive, but then after that, in the following years, they need to file as unmarried.

So if there are young kids involved, then a person can file as head of household, which is, which is a little closer to married filing jointly. But for most of the people, the people that we're talking about here anyway they're looking at filing as a single taxpayer going forward.

And when you're a single taxpayer, the standard deductions are lower and the tax brackets basically are higher. You get to higher levels faster. And so I put together a conglomeration. Here's an example of, grabbing some things from some actual client, tax returns, and putting them into our tax planning software.

And take a look here at the top, one year was income of $131,000, right? With the standard deduction that's in there. And you get tax due of about $12,000. And when we take that same income and look at that as a single tax filer here, taxes go up to almost $20,000, right?

So, I mean, more than a 50 percent increase, maybe close to a 75 percent increase in taxes by going from married filing jointly to single.  And you know, on the tax bracket as a married filing jointly with that income, solidly in the 22 percent tax bracket; as a single person, you're pretty solidly in the 24 percent bracket. So, that's something to be aware of. People can tend to forget that.

So what, what do we do about that? And let me make just one comment, you know, this is using the exact same income. There's probably going to be some differences, right? Where maybe no social security or social security gets cut down. I mean, it's not dollar for dollar. So maybe instead of a 50 percent increase, we're talking a 20 percent or a 25 percent increase. But it's still going to be different and higher in the future for a person as a single taxpayer.

So at this time of the year, when we're talking with our, with all of our clients about, should we do Roth conversions and intentionally pay some taxes at today's tax rate, so we're not paying higher taxes in the future.

You know, usually, we're thinking about giving money to kids, giving money to grandkids, inheritance-type things. This is a type of situation where if you were somebody, you know, find themselves in a position where they've lost a spouse, maybe this is the year where we should be doing where they should be considering before the end of the year here, doing some Roth conversions, accelerating some income, right?

Like paying taxes at today's rates. Because tomorrow's rates are going to be higher. And similarly on the other side, if there are deductions, I'm going to donate to charity or something, maybe we look to push that into the next year when we know the tax rates are going to be higher.

So that's what I'm thinking about today, and as always I'm interested in what you're thinking about. If you're watching this on YouTube, put a comment in the comment box or shoot me an email directly. And as always, thanks for watching.