Wednesday, September 1, 2021
Edward F. McQuarrie (Santa Clara; Google Scholar), The Widow Tax Hit: Much Ado About Nothing?:
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.