January 1, 2022, marked the start of ending what is commonly known as the “widow’s tax” and January 1, 2023, will mark the end of the phase-in. What effect will all of this have?
Let’s start by explaining “Widow’s Tax”. That term was 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 actually a tax. Rather, it was an offset that occured when a surviving MilSpouse received SBP and was also awarded DIC. When that happened, the previous law required 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.
Also ending January 1, 2023, will be the partial or full refund of SBP premiums. Previously, a surviving spouse’s timely and successful application for DIC would have seen a partial or full refund of premiums paid into SBP during the servicemember’s retirement. As of January 2023, seeing that DIC will no longer be offset by SBP the partial or full refund of premiums will no longer be paid.
Also ending January 2023 will be the Special Survivor Indemnity Allowance (SSIA). This was an allowance given to a surviving spouse receiving both SBP and DIC.
For more information about this subject and interpreting the changes taking place, visit DFAS.mil.
This article was originally published June 14, 2019.