Is The Basic Death Benefit Taxable?

The Basic Death Benefit Taxable

The basic employee death benefit (BEDB) is a benefit that continues to be misunderstood by many employees.    One question that came into our inbox recently – Is the basic employee death benefit taxable?  Yes it is.

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First let’s define what the BEDB is.  It is a benefit that is paid to the spouse of a deceased employee.  The benefit may also be paid to a former spouse if there is a court-order.  There are eligibility requirements that must also be met by the deceased employee during his/her tenure.  The employee must have completed eighteen months of civilian service (creditable).  The employee died while under the provisions of FERS or who had applied for retirement but had not actually separated from service before death.

The BEDB is $15,000 increased by Civil Service Retirement System (CSRS) COLAs as of December 1, 1987.  The BEDB is  $15,000 plus 50% of the deceased employee’s final salary or high-three average salary whichever is higher.  The BEDB increased by $16,786.21 making the benefit equivalent to $31,786.21 as of January 1, 2014.

The surviving spouse or former spouse may collect the benefits in two way: in a lump sum or in 36 monthly payments.  Many spouses choose the lump sum payment but should analyze their own personal financial situation as the lump sum payment may throw them into another tax bracket.  While the lump sum payment may be very helpful, one should also be aware of possible tax consequences that might not fit into your budget plans.

The BEDB is still taxable even if you choose the 36 monthly payments.  It does however, give one the ability to deal with the taxes differently without impacting the tax bracket.   When receiving monthly payments interest is included, making the overall benefit greater than a single lump sum amount.  If you choose to receive monthly payments, you can stop them at any time and receive a lump sum for the remaining benefit.  However, when the monthly payments are stopped so is the interest.

It is wise to counsel, analyze and evaluate your financial circumstances with a knowledgeable financial professional before making a decision.  Discussing the BEDB is all a part of taking care of the end of life business.  If you have already discussed the issue with a spouse and determined what steps to take in the event of death, then you don’t have to worry about being hit with a new situation at a time when you are emotionally burdened.

P. S.  Always Remember to Share What You Know.

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