Military Families Deal With Unintended Consequence Of 2017 Tax Law

Jul 5, 2019
Originally published on July 5, 2019 7:36 pm
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MARY LOUISE KELLY, HOST:

A somber note amid this week's military-themed celebrations - the announcement by the Army of the latest American casualties in Afghanistan. Two soldiers died last week and another on Sunday. Their families are spending this holiday weekend dealing with grief and also dealing with many complicated and consequential decisions as they navigate the maze of death benefits and taxes. You heard that right - taxes on those benefits.

NPR's Quil Lawrence reports that an unintended consequence of the 2017 tax law has made these decisions even harder.

QUIL LAWRENCE, BYLINE: The mayor of North Ogden, Utah, took a leave of absence last year to serve his fourth combat deployment. He was killed in action.

JENNIE TAYLOR: My name is Jennie Taylor, and I am the proud wife and widow of Army Major Brent Russell Taylor. And together, he and I have seven children. And he was in the military 15 years before he was killed in Afghanistan last fall in November of 2018.

LAWRENCE: Jennie Taylor says that amid the blinding grief, she was asked to immediately sort through her death benefit options and make irreversible decisions. As a homemaker, she needed these benefits to support their seven kids. Another Army widow advised her that the wrong choices could carry a huge cost in taxes.

TAYLOR: I have to admit I just didn't believe her at first.

LAWRENCE: This is actually a new problem borne of an attempt to stop wealthy people from using their kids as a tax shelter. Part of the 2017 tax overhaul raised taxes on kiddie trust funds, but unintentionally, that hit military families who put death benefits in their kids' names.

TAYLOR: My child might be subject to 35% of this death benefit being paid in taxes. And that child could be a baby. You know, my youngest was not quite 1 when my husband was killed. My oldest is only 13.

LAWRENCE: But the reason war widows have been putting death benefits in their kids' names is because of a much older problem. Essentially, there are two main death benefits. One comes from the Department of Veterans Affairs. The other is a Pentagon life insurance program that troops can pay into. But if a surviving spouse is getting both, federal rules require an offset to save the government money. So every dollar from the Pentagon program reduces the VA program by a dollar. It's been called the widow's tax.

To avoid the offset, widows started putting the insurance in their kids' names, which was fine until the kiddie trust fund tax rate went up last year. Worse - no one saw it coming, so many families weren't expecting to owe thousands of dollars at tax time, says Ashlynne Haycock with TAPS, the Tragedy Assistance Program for Survivors.

ASHLYNNE HAYCOCK: We've heard families say they had to pick between rent and food. We've heard families say they had to go try and get a second job to pay this tax bill. Or in some cases, a lot of our surviving spouses don't work because they're raising young children.

LAWRENCE: About 65,000 surviving husbands or wives are affected, Haycock says. And the offset can cost them around a thousand dollars a month. Congress is trying to put an end to that offset so surviving spouses can get both their full VA benefit and Pentagon life insurance they paid into without any need to shelter the money in their kids' names.

(SOUNDBITE OF ARCHIVED RECORDING)

DOUG JONES: I introduce this bipartisan legislation with my friend and colleague, Senator Collins.

LAWRENCE: That's Alabama Democrat Doug Jones, who introduced a fix in the Senate with Maine Republican Susan Collins.

(SOUNDBITE OF ARCHIVED RECORDING)

JONES: Legislation which is designed to right a terrible wrong has been introduced numerous times over the last 18 years but without success.

LAWRENCE: Since the recent wars, began Congress has been promising to fix the widow's tax. Now there are more than 70 co-sponsors in the Senate and more than 300 in the House. But it was blocked last week in the Senate by someone on the Republican side, most probably because of the high cost - 5.7 billion over 10 years. Advocates say they're still hopeful it will pass this summer. In the meantime, Jennie Taylor is throwing a barbecue.

TAYLOR: We're having a big birthday party. My husband would be 40 on Saturday, July 6. He always joked with his mom that he was born two days late.

LAWRENCE: She and her husband had planned the party last year, and Taylor decided to still have it and throw a fundraiser for a foundation she started.

TAYLOR: A day to come together and have some healing again. Healing is what you always need. We all need healing, and the best way to do that is to come together.

LAWRENCE: She's refusing to be bitter, but she also hopes Congress will fix the offset soon for the financial security but also the horrible stress of making those choices after a loved one's death - for her but also for younger, less-prominent families.

TAYLOR: You and I both know I'm not the last military window to face this. My hometown lost another one Sunday. And now I - my heart breaks for his widow to think, wow, she's going to go through the same thing.

LAWRENCE: That would be the widow and infant son of Army Sergeant First Class Elliott J. Robbins, who died in Afghanistan on Sunday. Quil Lawrence, NPR News. Transcript provided by NPR, Copyright NPR.