Recently, there has been a lot of press surrounding the “Widow’s Tax,” a label given to a provision in the law affecting Military Spouses who receive monthly survivor benefits from both the Survivor Benefit Plan (SBP) and Dependency Indemnity Compensation (DIC) from the VA. With SBP, the military retiree enrolls in the program with Defense Finance and Accounting Service (DFAS) and pays into it through their retired pay. Upon the retiree’s death, the surviving spouse beneficiary receives a monthly payment that is some percentage of the retiree’s pay. DIC, on the other hand, is a tax-free benefit paid only to an eligible spouse of a Veteran whose death resulted from service-connected injury or disease.
The “Widow’s Tax” is not a tax. Rather, it is an offset that occurs when a surviving MilSpouse receives SBP and is also awarded DIC. When that happens, the law requires that DFAS deduct the amount of DIC received from the SBP payout, and only pay the remaining SBP amount to the surviving spouse. DIC is a tax-free payment, even when receiving the offset, whereas SBP is taxable.
In addition, a MilSpouse’s timely and successful application for DIC will see a partial or full refund of premiums paid into SBP during the servicemember’s retirement. If the SBP annuity is greater than the DIC payment, DFAS calculates a partial refund based on premiums paid on that reduced SBP amount. If the DIC payment is greater than the SBP annuity, SBP completely stops and DFAS will refund all eligible basic spouse premiums paid into SBP during the servicemember’s retirement.
DFAS pays a refund of SBP premiums to the surviving spouse if the spouse applies for DIC within one year of the servicemember’s death. Be aware that this refund is taxable income to the spouse, since the government deducted SBP premium payments from the servicemember’s retired pay pre-tax.
Surviving spouses receiving both SBP and DIC also receive a monthly benefit called Special Survivor Indemnity Allowance (SSIA). This is a permanent benefit that currently amounts to $318 per month, which changes annually to account for a cost-of-living adjustment.
For more information:
https://www.aafmaa.com/learning-hub/blog/post/2779
https://www.dfas.mil/retiredmilitary/survivors/Understanding-SBP-DIC-SSIA.html