The inability of Democrats and Republicans in Congress to work together for the public is grossly obvious in their failure to repair a glitch in the 2017 federal tax law that heavily increased taxation on survivor benefits for children of military personnel who died during wartime.
If Congress can’t fix this before its current session ends in a few days, the unintended and unjust tax hike will be imposed a second year.
The situation made financial planning harder for thousands of “Gold Star” families (those with an immediate member who died in the service while the nation was at war) because they don’t know if their tax bills for 2019 on these benefits will be in the hundreds or the thousands of dollars.
Critics say the problem resulted from the 2017 Tax Cuts and Jobs Act being rushed through and without hearings. Such lack of care due and haste has had similar consequences in the North Carolina legislature.
One of many provisions of the Tax Cuts and Jobs Act that simplified tax laws included ending a rule enacted in 1986 to discourage wealthy parents from giving large amounts of money to their children to dodge taxes.
The new arrangement lets parents file wholly separate returns for themselves and their kids, but it increased tax rates on even low levels of unearned income for children to near 40%.
This applied to compensation from the Survivor Benefit Plan, a U.S. Department of Defense (DOD) insurance policy that usually pays about $1,050 a month.
These tax rates were around 12-15% previously, so the higher rates tripled and quadrupled taxes on compensation through the Survivor Benefit Plan.
The glitch also affected recipients of scholarship grants and children of fallen police officers and firefighters who receive benefits from state and local governments. The American Council on Education estimates that it has affected 1.4 million students, mostly from middle- and lower-income families.
The issue drew national headlines this spring and prompted House and Senate legislative action, but different plans to resolve it have just sat on desks since then.
Republicans in Congress are to blame for rushing the 2017 tax law without preventing some of its unintended consequences, but Democrats are at fault for using the Gold Stat glitch as a bargaining chip by not approving legislation that would correct it unless certain measures Republicans don’t like are tacked on.
One possible remedy is a defense spending bill, approved by the House this year, making it unnecessary for Gold Star widows and widowers to designate children as beneficiaries of their late spouse’s death benefits.
They’ve done this for decades to avoid having benefits from the DOD’s Survivor Benefit Plan offset additional benefits from the U.S. Department of Veterans Affairs.
The VA pays most surviving spouses Dependency and Indemnity Compensation benefits averaging about $1,300 a month.
The House defense bill, which sets the Pentagon’s budget, would undo the benefit offset by allowing surviving spouses to receive both benefits directly without a child intermediary.
The military community calls this benefit offset requirement the “widow’s tax,” although it is not actually a tax. (“Offsetting” means a dollar of the latter benefit is subtracted for every dollar of the former.)
The offset requirement affects more military families than those with surprise tax bills. There are roughly 10,000 children getting Survivor Benefit Plan annuities whom the 2017 tax law may have adversely affected. There are 65,000 surviving spouses paying the widow’s tax.
The House defense bill is the best and most complete available choice for addressing a situation that shouldn’t exist for the surviving families of those who lost their lives while serving in the defense of the United States.
This corrective legislation needs to be approved.