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Tax rates for Survivor Benefit Payments Increased Substantially Under the Tax Cut and Jobs Act of 2017

Families of service members who died while on active duty have been adversely affected by recent changes to the tax code. Service members may pay to opt-in to the DoD Survivor Benefit Plan (SBP), a paid annuity program that entitles the spouse or child beneficiary to 55% of the members retired pay at the time of death (a taxable benefit). Surviving spouses also are entitled to VA Dependency and Indemnity Compensation (DIC) which pays $1,300 per month (non-taxable). Federal law prohibits a surviving spouse from receiving both SBP and DIC, unless the smaller payment is offset by a dollar-for-dollar reduction from the other payment. This "widow's tax" reduces benefits an average of $11,000 annually. To avoid the offset, service members typically name their young children, who may receive the benefit until age 18 or 22 (if they are full-time students), as beneficiaries for SBP payments. The 2017 Tax Cuts and Jobs Act changed the rate at which the child SBP payments are taxed, treating them as payments from a trust or estate which can be taxed up to 37%, rather than using the parent’s rate. Advocates have sought to change the widow's tax for 25 years with no result, but legislation to remedy the tax treatment has been proposed.