Understanding Tax Benefits for Survivors

No one wants to consider losing a loved one, but when this happens it is important to keep in mind that there are some important tax issues benefits available.  Several groups, such as the Department of Defense, Department of Veterans Affairs, Social Security Administration and the Internal Revenue Service (IRS), offer certain survivor benefits, many of which have tax consequences.  Below are some general guidelines on common benefits and how they are affected by taxes, but be sure to check with each agency for up-to-date benefit availability and requirements. 

Tax forgiveness is one area that becomes relevant when a member of the U.S. Armed Forces dies while in active service, either in a combat zone or from an injury or disease.    When this happens, the IRS forgives the soldier’s income tax liability in full for the tax year in which the death occurred.  A tax that is considered forgiven does not have to be paid.  The tax liability is also forgiven for any previous tax year ending on or after the first day the member served in a combat zone in active service. Any tax liability that may be owed at the time of death will be forgiven, and any tax liability paid after the date of death will be refunded.

Tax forgiveness also applies to certain members of the Armed Forces serving outside the combat zone.  The rules for tax forgiveness become very complex when joint tax returns were filed, because it is only available for the service member’s portion of a joint tax liability.  This is one time where consulting a tax preparer can help explain all of the relevant details.

Different agencies provide a range of services and financial assistance whenever a soldier is killed in action.  For example, the Department of Defense offers survivors various benefits.  One of the most beneficial forms of assistance is a one-time, non-taxable death gratuity of $100,000 to help with immediate expenses and to provide assistance during the readjustment period. 

In addition, survivors may also continue to live in government housing or receive a lump-sum payment for housing needs for up to one year.  Relocation costs within one year of the death of the service member are also available.  Both the relocation costs and the housing benefit are not subject to income tax.

Next, the Department of Defense administers a program called the Uniformed Services Survivor Benefit Plan, commonly referred to as the Survivor Benefit Plan.  This plan will pay the surviving spouse over 50% of what the service member’s retirement would have been if he or she had retired on 100% disability at the time of death.  The payments, which are indexed annually for inflation, are subject to income tax. 

Survivors may apply for the Department of Veterans Affairs monthly compensation to survivors called the Dependency and Indemnity Compensation payment. This is a flat-rate monthly disbursement that is adjusted annually for inflation.  Surviving spouses with dependent children are eligible for additional monthly amount for each child and may also qualify for an additional transitional assistance of $250 each month.  Neither the Dependency and Indemnity Compensation payment nor the transitional assistance payments are subject to income tax. 

The Social Security Administration also offers widow, widower or dependent benefits.  Depending on the survivor’s total annual income, up to 85% of Social Security benefits may be taxable.  In general, the amount that is taxable is determined by looking at the total income of the surviving recipient. On many occasions, the benefits received by dependent children are subject to taxes only if the child receives income from other sources.   A tax preparer can provide assistance in determining how much of the Social Security benefits received may be taxable. 

Finally, remember that there are tax implications resulting from what the survivor does with the payments.  For example, although much of the assistance a surviving spouse receives is not taxed or only partially taxed, if it is invested, the earnings are taxable. 

Additional details and eligibility requirements on many of these benefits can be found by visiting the Web sites of the agencies noted, and other conditions may apply.