Skip to main content
February 10, 2019
Question

Military and Government Disability Pensions

  • February 10, 2019
  • 3 replies
  • 0 views

I am retired military (USAF).  I am also a 100% Service-connected disable veteran and receive a monthly pension.  The IRS Publication 525 page 18,  state that my USAF Retirement pay is not taxable.  How do I apply this to my 2018 tax return?

Publication 525 Cat. No. 15047D Taxable and Nontaxable Income
For use in preparing 2018 Returns

Military and Government Disability Pensions Certain military and government disability pensions aren't taxable. Service-connected disability. You may be able to exclude from income amounts you receive as a pension, annuity, or similar allowance for personal injury or sickness resulting from active service in one of the following government services. The armed forces of any country.  The National Oceanic and Atmospheric Administration.  The Public Health Service. The Foreign Service. Conditions for exclusion. Don’t include the disability payments in your income if any of the following conditions apply. 1. You were entitled to receive a disability payment before September 25, 1975. 2. You were a member of a listed government service or its reserve component, or were under a binding written commitment to become a member, on September 24, 1975. 3. You receive the disability payments for a combat-related injury. This is a personal injury or sickness that: a. Results directly from armed conflict; b. Takes place while you're engaged in extra-hazardous service; c. Takes place under conditions simulating war, including training exercises such as maneuvers; or d. Is caused by an instrumentality of war. 4. You would be entitled to receive disability compensation from the VA if you filed an application for it. Your exclusion under this condition is equal to the amount you would be entitled to receive from the VA. Pension based on years of service. If you receive a disability pension based on years of service, in most cases you must include it in your income. However, if the pension qualifies for the exclusion for a service-connected disability (discussed earlier), don't include in income the part of your pension that you would have received if the pension had been based on a percentage of disability. You must include the rest of your pension in your income. Retroactive VA determination. If you retire from the U.S. Armed Forces based on years of service and are later given a retroactive service-connected disability rating by the VA, your retirement pay for the retroactive period is excluded from income up to the amount of VA disability benefits you would have been entitled to receive. You can claim a refund of any tax paid on the excludable amount (subject to the statute of limitations) by filing an amended return on Form 1040X for each previous year during the retroactive period. You must include with each Form 1040X a copy of the official VA determination letter granting the retroactive benefit. The letter must show the amount withheld and the effective date of the benefit.
If you receive a lump-sum disability severance payment and are later awarded VA disability benefits, exclude 100% of the severance benefit from your income. However, you must include in your income any lump-sum readjustment or other non disability severance payment you received on release from active duty, even if you're later given a retroactive disability rating by the VA. Special statute of limitations. In most cases, under the statute of limitations a claim for credit or refund must be filed within 3 years from the time a return was filed. However, if you receive a retroactive service-connected disability rating determination, the statute of limitations is extended by a 1-year period beginning on the date of the determination. This 1-year extended period applies to claims for credit or refund filed after June 17, 2008, and doesn't apply to any tax year that began more than 5 years before the date of the determination. Example 19. You retired in 2012 and receive a pension based on your years of service. On August 3, 2018, you receive a determination of service-connected disability retroactive to 2012. Generally, you could claim a refund for the taxes paid on your pension for 2015, 2016, and 2017. However, under the special limitation period, you can also file a claim for 2014 as long as you file the claim by August 3, 2019. You can't file a claim for 2012 and 2013 because those tax years began more than 5 years before the determination.   

3 replies

BarbL
February 11, 2019

The portion of your pay received as a result of your disability rating is non-taxable; however, the portion received based on your years of service is taxable.   

 

Military retirement pay and VA disability compensation are completely separate forms of compensation with different tax treatment. They are paid from different agencies and represent two different forms of compensation. Military retirement pay is a pension that is based on your years of service. VA disability compensation is a monetary award that is based on your decreased ability to perform work after leaving the military.

 

Your disability pay comes from the VA, and is not included on the 1099-R you received from DFAS for your military pension. No adjustment is necessary for tax purposes.  

**Say "Thanks" by clicking the thumb icon in a post**Mark the post that answers your question by clicking on "Mark as Best Answer"
June 24, 2019

I am not totally understanding this topic.  Am I right that Military retirement pay is 100% taxable even though you may be receiving disability pay (over 30% disabled) from the VA.

I am being told that since I am honorably retired and I am also disabled then I should not being taxed on my Military Retiree pay at 100%.  The scenario being floated is that if you are 80% disabled then only 20% of your Military retirement pay should be taxed.

Can you help me understand this?

Carl11_2
June 25, 2019

Here's the clear cut bottom line.

If you receive a 1099-R from DFAS then the amount reported in box 2a is taxable income. This is assuming the standard distribution code in box 7 of that 1099-R is a 7. Now if you file a state tax return your state may treat it differently and you will deal with that separately on the state return only when you get to that point in the program.

Carl11_2
September 2, 2019

Are you receiving any compensation at all from DFAS? I ask because I doubt it if you are classified with a 100% disability rating. With that rating DFAS pays nothing and the VA (Veterans Administration) pays everything. With the VA Pay you don't receive any type of tax reporting document because VA disability pay is not taxable or reportable on any tax return.

Par chance did you retire in 2018 or earlier and start receiving your disability pay any time "AFTER" you received your first retirement check from DFAS? If yes, do you have the letter from the VA that explicitly states your disability pay is retroactive back to your retirement date, or any other date?

November 23, 2019

Carl, how can I contact you for a better discussion on this topic? I'm at [email address removed] so we can talk thorough this issue.

 

IsabellaG
November 25, 2019

@Carl11_2: Please see James34's request.

**Say "Thanks" by clicking the thumb icon in a post**Mark the post that answers your question by clicking on "Mark as Best Answer"
March 19, 2021

I retired from LA County (Sheriff's) on a disability retirement 09-08-76. SVC.CON.DISB shows on box (unlabled) but would be box 19.  Why can't I find it in your program?

March 19, 2021

@MommaGilmore  What form did you receive to report your disability income?  Are you under retirement age?

 

Since we can't see your return in this forum, here's some general info on Police Disability Income. 

 

If you received a 1099-R, be sure to indicate is it for a 'law enforcement' pension when entering in TurboTax.

 

Click this link for more info on How to Enter 1099-R