MarvinPhyllis
Returning Member

Military and Government Disability Pensions

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.