Defense Bill To Fix 'Widow's Tax' On Military Death Benefits

Lawmakers reached a bipartisan agreement on greater benefits for grieving military families.

WASHINGTON ― A bill funding the Defense Department will finally end a policy military families have hated for decades: the so-called widow’s tax, which prevents survivors from receiving full benefits from both the Pentagon and the Department of Veterans Affairs.

An error in the Republican tax law passed at the end of 2017 made the problem dramatically worse for some families ― and may have encouraged lawmakers to work out the fix announced this week.

A bipartisan agreement in the Senate and House on the National Defense Authorization Act, unveiled Monday night, allocates $5.7 billion to allow the surviving families of military members who die on active duty or in retirement to receive the full benefits for which they’re eligible.

It’s a tiny part of the $738 billion defense bill, but it’s a huge deal for veterans service organizations that have been lobbying for decades to undo the widow’s tax. The outcome seemed uncertain even days ago.

“That it happened is incredible,” said Ashlynne Haycock, deputy policy director of the Tragedy Assistance Program for Survivors, or TAPS.

The widow’s tax is more accurately called a benefit offset. It’s not actually a tax. When a service member dies on active duty or in retirement, that person’s family is eligible for two types of monthly benefits ― one from the Defense Department, the other from the VA. But for every dollar a surviving spouse might receive in VA benefits, they receive a dollar less in DOD benefits. That’s the “tax.”

Roughly 65,000 surviving spouses are affected by the offset. Some designate their children as beneficiaries in order to receive the full benefits, but that strategy started backfiring this year as a result of the tax law Republicans passed at the end of 2017. Republicans changed the taxation of children’s unearned income, targeting tax avoidance but not realizing it would clobber military families.

News stories about Gold Star families (the surviving family members of someone who died on active duty) affected by new the tax glitch brought additional attention to the underlying benefit problem. One military widow told HuffPost she got socked with a tax bill for almost $10,000 this year.

“Words cannot begin to express the gravity of this news for the tens of thousands of Gold Star families who have been hurt by this policy for four decades,” said Armed Services Committee member Sen. Doug Jones (D-Ala.).

The House had already passed a retirement security bill that would have addressed the tax problem created by the new law. That bill still may get a Senate vote, but by undoing the underlying benefit offset, the defense bill should obviate the need for fixing the “kiddie tax” provision of that legislation ― at least for military families. (The same tax glitch also affected students and the surviving family members of fallen first responders.)

Republicans and Democrats said they agreed on fixing the widow’s tax this year, though there was some fussing over the $5.7 billion cost, which was ultimately added to the total cost of the bill. The House and Senate will likely pass the broader measure before the end of the year.

The legislation phases out the benefit offset over a period of three years, rather than immediately starting next year, so it’s not quite perfect for military advocates, but they’ll take it.

“It’s the best we’re going to get and we’ll never have another shot at this,” Haycock said.