Is SBP Taxable? Tax Rules and Reporting for Survivor Benefit Plan
Understand how Survivor Benefit Plan (SBP) payments are taxed, reported, and managed, including key rules, withholding details, and recordkeeping tips.
Military families often rely on the Survivor Benefit Plan (SBP) for financial security following a service member’s death. Beneficiaries should be aware, however, that these payments typically have federal income tax implications. Understanding how SBP benefits are taxed is necessary for accurate reporting and financial planning.
This article outlines the tax rules for SBP payments, covering how they are classified, withholding procedures, reporting requirements, potential exclusions from income, and recordkeeping practices.
Tax Classification of SBP
Survivor Benefit Plan payments are generally considered taxable income at the federal level. This treatment stems from how the plan is funded; service members typically pay SBP premiums using pre-tax dollars deducted from their gross retired pay. Because the contributions were not taxed initially, the annuity payments received by the survivor are subject to federal income tax.
The Internal Revenue Service (IRS) categorizes SBP payments as annuity income, similar to pensions.1Internal Revenue Service. Topic No. 410 Pensions and Annuities The Defense Finance and Accounting Service (DFAS), which manages SBP, handles these payments accordingly for tax purposes. While generally taxable, an exception exists if the service member paid premiums using after-tax funds, which is discussed later.
State tax laws regarding SBP income vary widely. Some states exempt military retirement-related income, including SBP, while others tax it fully or partially. Beneficiaries should check with their state’s tax authority for specific rules. DFAS reports SBP income to state authorities regardless of the state’s tax policy.
Determining Withholding Rates
DFAS manages the withholding of federal income tax from SBP annuities. Beneficiaries can control the amount withheld using IRS Form W-4P, Withholding Certificate for Periodic Pension or Annuity Payments.2American Payroll Association. IRS Releases 2024 Publication 15-T and Forms W-4, W-4P, and W-4R This form allows annuitants to provide details that determine the tax withheld from each payment.
If a beneficiary does not submit a Form W-4P, DFAS must withhold federal income tax using a default status. Currently, this default is based on a filing status of single with no adjustments, which may not match the beneficiary’s actual tax liability.
To adjust withholding, beneficiaries should submit a completed Form W-4P to DFAS. The form requires information like filing status, income from other sources, dependents, and other adjustments. DFAS uses this information and IRS methods, outlined in Publication 15-T, Federal Income Tax Withholding Methods, to calculate withholding.3Internal Revenue Service. About Publication 15-T, Federal Income Tax Withholding Methods Beneficiaries can update their W-4P anytime via mail, fax, or the myPay online portal.
Beneficiaries can usually elect to have no federal income tax withheld by indicating this preference on Form W-4P or through myPay. Choosing this option means the beneficiary must ensure their tax liability is covered through other means, like estimated tax payments, to avoid penalties. This option may not be available for payments delivered outside the U.S.4Internal Revenue Service. Pensions and Annuity Withholding for International Taxpayers
DFAS has limited ability to withhold state income tax for SBP annuitants. It can only withhold for one state at a time if an agreement exists between the state and the Department of Defense, and currently, this service is not available for SBP survivor annuitants. Beneficiaries need to address state tax obligations directly with their state.
Reporting Steps for SBP
Reporting SBP income accurately on federal tax returns requires information from DFAS. Annually, DFAS sends IRS Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., to SBP recipients.5Defense Finance and Accounting Service. Survivor Frequently Asked Questions This form shows the total SBP payments received and the taxable portion for the year.
Key information on Form 1099-R includes Box 1 (Gross distribution) and Box 2a (Taxable amount). Box 1 displays the total payments received, while Box 2a usually shows the amount subject to federal income tax, calculated by DFAS based on premium payment history.
This information must be reported on your annual federal income tax return, Form 1040 or Form 1040-SR. The total distribution from Box 1 generally goes on Line 5a, and the taxable amount from Box 2a is reported on Line 5b. Use the figures exactly as shown on Form 1099-R, as DFAS also reports this information to the IRS.
Beneficiaries should receive Form 1099-R by January 31st following the tax year.6Military Officers Association of America. When Will I Get My 2024 Tax Statement? DFAS typically makes the forms available earlier via the myPay portal. Ensure DFAS has your correct mailing address if you prefer postal delivery. Duplicate forms can often be requested through myPay or other DFAS channels if needed.
Situations for Possible Exclusions
While SBP payments are usually taxable, portions may be excluded from income if the service member paid premiums with after-tax dollars. This is less common than using pre-tax deductions from retired pay. After-tax payments might occur through direct remittances or deductions from non-taxable sources like VA disability compensation received instead of taxable retired pay.
In these cases, the SBP annuity payments are considered non-taxable until the total amount excluded equals the sum of the after-tax premiums paid by the member. This tax-free portion represents the return of the member’s “cost basis” or “investment in the contract.”
Once the cumulative tax-free payments equal the total after-tax contributions, all subsequent SBP payments become fully taxable. The IRS provides rules, often detailed in Publication 575, Pension and Annuity Income, for calculating the tax-free portion under Internal Revenue Code Section 72, which governs annuities.7Internal Revenue Service. Publication 575, Pension and Annuity Income DFAS tracks these contributions and should report the correct taxable amount on Form 1099-R.
Recordkeeping Essentials
Maintaining organized records is important for managing tax obligations related to SBP payments. The primary document is the annual Form 1099-R from DFAS, which details the total annuity paid and the taxable amount. Keep these forms as they provide the figures needed for your tax return.
Retaining copies of your filed federal tax returns (Form 1040 or 1040-SR) is also advisable. These show how you reported the SBP income alongside your overall financial situation. If your situation involves the recovery of after-tax contributions, keep any supporting documentation from DFAS regarding premium payments.
The IRS generally recommends keeping tax records for at least three years from the date you filed your return or the due date, whichever is later.8Internal Revenue Service. How Long Should I Keep Records? This period covers the standard window for audits. Certain situations, like significantly underreported income or specific types of deductions, may require keeping records longer (six or seven years). Holding onto SBP-related documents for at least three years is a prudent practice.
Accessing past Form 1099-Rs is often simple via the myPay online portal (https://mypay.dfas.mil), which typically provides access to the current and two prior years’ forms. If you don’t use myPay or need older records, contact DFAS. Keeping your contact information updated with DFAS ensures timely receipt of mailed documents if you opt out of electronic delivery.