“If there’s ever anything we can do for you, please let us…”
“Yes, there is. When is Congress going to fix the Widow’s Tax.”
It was a familiar refrain from me masquerading as a question about an unfair system that penalized approximately 65,000 surviving spouses of military members. This time my statement was truncating the same final question that staffers on the Senate Armed Services Committee (SASC) would offer every time they were in the room with military attorneys. And, every time I happened to be among the DoD attorneys meeting with our counterparts at SASC, I would ask about the Widow’s Tax.
These interactions got to the point where during my last encounter with the SASC staffers, their senior counsel (a former JAG himself) drew a long sigh, I think realizing that we had this exact exchange several times previously. He then dove into the same well-worn response about why fixing the Widow’s Tax was unlikely (which I will explain shortly). My colleagues on faculty at The Judge Advocate General’s School immediately zoned out. This was not a question about national security law or criminal law or any of the much sexier portfolios taught at the school, but it was a seemingly obtuse question about tax.
Like all financial topics that have the word “tax” in them, the Widow’s Tax seemed esoterically boring on the surface, but had real world impacts that were massive – especially for those who serve and their families. So, what was the Widow’s Tax, why did it finally change and what took so long? Let’s discuss!
Before we get into the analysis, I think it’s important to point out a couple of ground rules: 1) the word “tax” really is a misnomer. It’s much more of a payment offset to survivor benefits, but “Widow’s Tax” has a catchier ring than “Widow’s Survivor Benefit Payment Offset.” 2) Military pay stops when a service member dies, so if the service member elected to pay into the Survivor Benefit Plan (SBP), the surviving spouse and/or children get a lifetime annuity. I will write more about SBP in a future article, but to understand the “Widow’s Tax,” a quick explanation of SBP might be helpful.
For decades, the Widow’s Tax unfairly punished military survivors whose sponsors died from service-connected causes. It forced them to forfeit part or all of their purchased SBP when they received Dependency and Indemnity Compensation (DIC) from the Veterans Administration (VA). These separate benefits offset one another, meaning every dollar widows or widowers received in military survivor benefits was reduced for every dollar they received from the VA. The penalty could statutorily cost survivors up to $12,000 a year. For a family that just lost one of the two income providers (or worse, the service member was the sole income provider), this was a significant budgetary punch in the gut – to say nothing of the additional emotional tax (pun intended) suffered by the surviving family members.
An example of how this practically played out is the following illustrative scenario (though one can also easily imagine more immediate losses from the wars in Iraq and Afghanistan):
· If a Vietnam Veteran had exposure to Agent Orange and then died of cancer thirty years after retiring, the VA might validate the cancer as being service-connected from the exposure to Agent Orange (assuming the cancer was deemed by the VA to have such a nexus).
· The VA would then assign compensation in the form of DIC; for our scenario, let’s assume that amount was $500 per month (using a hypothetical, round number for illustration purposes).
· If the veteran were a retiree and selected SBP at retirement, the surviving spouse might be eligible for a sum of $1000 per month (again using hypothetical, round numbers).
· If the DIC the surviving spouse received was $500 each month, the surviving spouse would still only receive $1000 total monthly. This is the Widow’s Tax (but it’s really an offset, as you can see).
· Note that DIC is not taxed, but SBP is, so the total received would be slightly higher than SBP alone because half of the money was not taxed. Nonetheless, this antiquated law pretty clearly and unfairly punished those service members who chose SBP and died of service-connected causes.
Punishing widows and orphans seems like bad policy (huge understatement), so why did it take the Widows Tax so long to be repealed? As with everything in the budgetary sausage making process, there were competing interests at play.
Without expanding DoD’s budget, Congress’ rules required that money would have to be taken from the same pot of non-essential defense spending areas like prescription drug subsidies for military families, which would raise Tricare copays. Increasing drug copays for military families also briefs poorly and affects many more service members. On its face, widows versus lower drug costs for military families seems like an unnecessary competition for resources, and that’s because it is.
Then, suddenly, everything changed when Congress and the President decided to significantly increase the defense budget after sporadic years of little or no growth and continuing resolutions, which had thwarted progress in areas like funding DIC with a larger pot of money. Indeed, it looked like stasis was going to happen again, but then in the middle of an impeachment inquiry, it didn’t. Somehow, the National Defense Authorization Act (NDAA) received nearly unanimous support.In December’s NDAA, Congress in a bipartisan effort, and in conjunction with the President’s signature, repealed the Widow’s Tax.
Previously under the Widow’s Tax, to avoid being effectively penalized for opting into SBP and then having their service member die of service-connected causes, survivors were essentially coerced to transfer their survivor benefits to their children (typically, via an annuity) in order to receive both benefits. Because of some tax changes in the NDAA and the SECURE ACT that Congress just passed, the Widow’s Tax repeal means that spouses can no longer transfer the SBP into an annuity for their child. However, there are plenty of other valid estate planning and tax strategies to pass the money to children. This is a major win for widows and widowers whose loved one died of a service-connected issue.
I am fairly certain that my canned, repeated response to “what can Congress do to help the military” did little more than cause my colleagues to wonder why I was asking about such an obtuse “tax” topic. Nevertheless, many organizations such as the Military Officers Association of America (MOAA) effectively lobbied for years to make this change for a deserving and silently suffering portion of the American population. These organizations deserve a tremendous amount of credit as do Congress (not to mention their dedicated staffs) and the President.
All too often it seems like our national discourse has turned divisive and vitriolic. Somehow, in the midst of an impeachment, our elected officials found common ground on an esoteric, but important, issue. In doing so, they stepped up to rearrange the budget in order to support those who have sacrificed so much for the country. I believe this merits reflection and appreciation.