Fact Check: Are DFAS survivor benefits taxable?

Are DFAS Survivor Benefits Taxable?

Introduction

The claim in question is whether survivor benefits provided by the Defense Finance and Accounting Service (DFAS) are taxable. This topic is particularly relevant for military families who rely on these benefits after the loss of a service member. The Survivor Benefit Plan (SBP) and Dependency and Indemnity Compensation (DIC) are two key components of these benefits, and understanding their tax implications is crucial for beneficiaries.

What We Know

1. Survivor Benefit Plan (SBP): The SBP is a program that allows military retirees to provide a portion of their retired pay to their survivors upon their death. The benefits can be up to 55% of the service member's retired pay 13.

2. Taxation of SBP: According to the DFAS, SBP payments are subject to federal income tax. Beneficiaries must fill out a W-4P form to determine the amount of federal income tax withheld from their annuity payments 59. Each January, DFAS issues a 1099-R form to report the taxable income from these benefits 5.

3. Dependency and Indemnity Compensation (DIC): DIC is a tax-exempt benefit provided by the Department of Veterans Affairs (VA) to surviving spouses and dependents of service members who die in the line of duty or from service-related injuries. Payments received under DIC are not subject to federal income tax 27.

4. Recent Changes: As of February 1, 2023, the SBP-DIC Offset, often referred to as the "Widow's Tax," was eliminated. This means that surviving spouses can now receive both their full SBP and DIC payments without any offset 78.

Analysis

The evidence surrounding the tax implications of DFAS survivor benefits presents a mixed picture, primarily hinging on the distinction between SBP and DIC.

• Source Reliability: The DFAS and VA are official government entities, which generally lends credibility to their information. Their websites provide direct guidance on the benefits and their tax implications, making them reliable sources for understanding the specifics of military survivor benefits 1258.

• Taxation of SBP: The DFAS explicitly states that SBP payments are taxable, and this is corroborated by the issuance of 1099-R forms, which are standard for reporting taxable income 5. However, the potential for confusion arises when considering the recent changes to tax withholding rates, which may affect how much tax is deducted from these benefits 4.

• DIC Tax Exemption: The tax-exempt status of DIC payments is clearly outlined by the VA, providing a stark contrast to the taxable nature of SBP payments. This distinction is critical for beneficiaries to understand, as it affects their overall financial planning 27.

• Potential Conflicts of Interest: While the information from DFAS and the VA is generally reliable, it is important to note that these agencies may have an interest in promoting the benefits they provide. However, the tax implications are standardized under IRS guidelines, which adds a layer of objectivity to the claims made by these agencies.

• Methodological Considerations: The information provided by DFAS and VA is based on current laws and regulations, but beneficiaries should be aware that tax laws can change. Therefore, staying updated with IRS announcements and consulting a tax professional is advisable for personalized guidance.

Conclusion

Verdict: True

The evidence indicates that DFAS survivor benefits, specifically the Survivor Benefit Plan (SBP), are indeed taxable under federal income tax laws. This conclusion is supported by official statements from the DFAS, which clearly outline the tax implications of SBP payments, including the requirement for beneficiaries to report these payments as taxable income via 1099-R forms. In contrast, Dependency and Indemnity Compensation (DIC) payments are explicitly tax-exempt, highlighting a significant distinction between the two types of benefits.

It is important to note that while the information from DFAS and the VA is credible, tax laws can be complex and subject to change. Beneficiaries should remain vigilant about updates to tax regulations and consider consulting a tax professional for personalized advice. Readers are encouraged to critically evaluate information and seek out reliable sources to ensure they fully understand the tax implications of their benefits.

Sources

1. Survivor Benefit Program - Military Compensation. militarypay.defense.gov
2. Current DIC Rates For Spouses And Dependents. va.gov
3. Survivor Benefit Program Overview - Military Compensation. militarypay.defense.gov
4. Because of IRS Change, SBP Beneficiaries Need to Check Their Tax Withholding. military.com
5. Manage Your SBP Annuity - Defense Finance Accounting Service (DFAS). dfas.mil
6. Survivor Benefit Plan (SBP) and Arrears of Pay Frequently Asked Questions. dfas.mil
7. Widow's Tax Now Completely Eliminated - TAPS. taps.org
8. Understanding SBP-DIC-SSIA. dfas.mil
9. Frequently Asked Questions - DFAS. dfas.mil
10. Retiree Newsletter. dfas.mil