Ask the Advisor: October/November 2021

What Is The Financial Impact of Widowhood?

Q:  What is the financial impact of widowhood?  I became a widow in 2019 and within days, Social Security notified me that I would receive my husband's benefit but would also lose all of mine.  In 2020 I got financially whiplashed at tax time by being thrown into the “single” tax rate category.  No young dependents, so no “qualifying widow” for me.  Between Social Security and IRS rules I lost $13,000! — M.S., CA.

A:  When a spouse dies, not only is there the profound emotional loss but also there’s frequently a financial one as well.  While a widow receives Social Security survivors benefits, she can’t receive the same amount of Social Security income that she and her deceased spouse enjoyed before.  And, while Social Security income drops, the effective tax rate tends to increase due to the change in filing status.  To top it all off, there are a host of bureaucratic hoops to jump through when a spouse passes away.  Here’s a few of the most important:

  1. You must return the Social Security benefit that your deceased spouse received for the month of death, and any received thereafter.  You are not allowed to keep Social Security checks received for the month a person dies, even when the death was on the last day of the month.  If your spouse passed away in September, the September benefit is the check received in October.  That money must be returned to the Social Security Administration, even if you were dealing with piles of medical bills in your spouse’s last month of life.
  2.  You will not receive a survivor benefit in addition to your own retirement benefit.  You receive the higher of the two and, for the overwhelming majority of women, that means giving up your own retirement benefit to receive the higher survivors benefit.
  3. If you receive your own retirement benefit, rather than a spouse benefit, your benefit will not automatically convert to a survivors benefit — you must apply.  You cannot apply online however, and you must get an appointment from the Social Security Administration.  Survivors must contact Social Security at 1-800-772-1213 to request an appointment.  News reports suggest this has been huge problem for many eligible beneficiaries during the COVID-19 pandemic, due to staffing shortages and closed local offices.  TSCL is still sorting through Social Security survivor data, which appears to be lower than the 5,886,000 forecast by the Social Security Trustees in 2020.  We are not certain whether some of this is because of deaths due to COVID-19, or problems that eligible beneficiaries may have had in scheduling appointments to file claims for survivor benefits, or both.
  4. Your tax filing status and exemptions change.  Tax rates and exemptions tend to be more favorable for married couples filing jointly.  When a spouse passes away, you will file as a “single” taxpayer in the following tax year.  Single taxpayers often must pay a higher effective rate than married couples, and you don’t qualify for the more generous standard exemption for joint filers.

Several approaches to modify Social Security benefits in order to aid widows are available to Congress.  One widely discussed option would boost the widow’s benefit to a percentage of the couple’s combined Social Security benefit (such as 75% of the combined benefit) when the deceased spouse was alive, allowing the widow to choose the higher of the new boosted benefit or what she would otherwise receive as a widow’s benefit.