Military and Government Disability Pensions

[MarvinPhyllis]

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.   

[BarbL]

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.  

[jerryblandford]

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?

[Carl]

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.

[poliep]

I have met several people saying if you are 60% disabled or more you can file an amendment (1040X).

I have met one person that already recieved payment. You must include with each Form 1040X a copy of the official VA determination letter granting the retroactive benefit. I got text two letters needed to be added and va retro and other look like cost analysis, but darn pics are blurring. I will do amendments when verify two letters needed. Good Luck.

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.

[Critter]

Ok...if you file a return and then later you are awarded a retro active disability reduction then you can amend prior year returns because the 1099-R you got originally is no longer correct.

Once you have been awarded the disability then the 1099-R for would correctly reflect the taxable portion and no adjustment would be needed. 

[rbrittain6]

Good afternoon Quickbooks Professionals,

I have a client in a similar situation (after military retirement, later diagnosed as 70% disabled).  The 1099R shows an amount, taxable amount (both the same) and a code 7 (normal distribution).  On the "General Rule" screen of the 1099R section within ProConnect Tax Online, there are fields called "Exclusion percentage" and "Exclusion amount."  When I enter 70, .70 or dollar amount, Proconnect Online is not calculating any amount.  What am I doing wrong?

[Carl]

Please note that I personally am not familiar with the ProConnect series software. I can only assume that an over-ride will be necessary, just as it is in the TurboTax program.

Assuming the rule at https://www.irs.gov/individuals/military/special-tax-considerations-for-veterans is what applies here, and further assuming the 2018 tax return has not yet been filed, you'll have to invoke an over-ride to manually enter necessary numbers on the required forms. Additionally, per the IRS the return will have to be mailed along with a copy of the VA letter to substantiate the tax exclusion amount from the amount reported in box 2 of the 1099-R.

Finally, I was of the impression that ProConnect has it's own support forum since it's only for use by CPAs, EAs and paid tax preparers. From what I see, it's at https://accountants-community.intuit.com/proconnect-proseries-us-en

Have things been changed now so that you are actually directed to this forum?

[Carl]

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?

[Yocox]

I am having a hard time understanding how to calculate the retirement pay amount to put that is suppose to be taxable.  

[Yocox]

Hi, 

I was wondering if you ever found the answer to this question?

[James34]

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]

@Carl: Please see James34's request.

[UnusuallyNat]

Carl or Any other Expert,

1. Would it be appropriate to request a correction to my 1099-R (retiree W2) as that distribution was coded "7" [normal] as opposed to what I believe *SHOULD* have been a "3" [disability] as my effective medical retirement was effective 29 Aug 2019 where I was placed (and is still) on TDRL (Temporary Disability Retirement List) and thus I am currently rated at 100% on this TDRL, but the maximum pay per TDRL is 75% for DoD (Department of Defense) if I wasn't eligible for VA (Veteran Administration) pay [which I was indeed eligible]? TDRL as the name implies is a "disability retirement" and consequently, it makes sense that the pay of a "disability retirement" should be distributed as such (or so I assume- 1.a is there something contrary to this somewhere).

Both DoD & VA knew my entire September 2019 pay (pay out on 1 Oct 2019) was supposed to be coming from the VA (as I went through the Integrated Disability Evaluation System [IDES] which is VA & DoD working together to determine my disability) and entirely TAX exempt....but they were about 3-5 days slow in finalizing my pay check, so instead of my money coming out of VA, a portion (75%) came out of DoD (and the remaining 25% eventually got paid days later by the VA). Thus almost $300 was sent to Uncle Sam in federal taxes on the 75% that was paid by DoD and coded "7".

I have already sent off my request for an ammendment to a distribution code 3, but as I have seen you around on this message board before with good tax answers, I am trying to get your input so I can get ready to file my taxes sooner rather than later.

2. Would this distribution code 3, then automatically count my federal tax paid for that amount exempt (and thus get back dollar for dollar exactly what was paid) and thus, not needing to do some "manual override" on Turbo Tax and having to send printed up forms (VA letter, etc.) to the IRS? I ABHOR anything that I have to physically mail off at the post office and is trying to see what I can do to avoid such a thing.

3. Along similar lines as it pertains to tax exemption as it pertains to disability, how would I go about requesting disability status from the IRS this tax season, as I am 100% disabled through VA, DoD, and SSA (Social Security Administration) all effective end of August 2019, so if and when I take a distribution out of my Thrift Saving Plan (TSP), I will avoid the tax penalty for early withdrawal (as I am currently 41 and no where close to the 59 1/2 age)? Unfortunately the IRS could not answer my question when I called them in November 2019 as the tax experts at the IRS are only available through the tax filing window (which I would imagine just started this month)?

I love taxes and get down into the minutia (I was planning on pursuing forensic accounting or something similar... but ultimately went with going in the medical field in the military after much accounting courses as well as an introductory personal income tax course).

Thanks in advance for your assistance in answering the three questions [to include the sub-question 1.a] above.

Nathalie

[ThomasM125]

If you received a form 1099-R with a distribution listed in box 1 and code 3 in box 7 it would be treated as taxable income in TurboTax. This is so because most disability income reported on a form 1099-R is taxable. If it is not taxable, then it would normally not be reported to you on a tax form.

If there was a taxable amount listed in box 2, then that amount would show up for the taxable income on your tax return. But if box 2 was left blank, then the amount in box 1 would show as taxable.

So it would be best to have the income treated as VA disability income that is not taxable and thus not reported on a 1099-R form. 

If the income is not taxable but is still reported on the 1099-R form, you can enter a deduction in the "Other Income" line on your form 1040 as follows and attach a statement to your tax return explaining why the income is not taxable:

1. Find the "Income and Expenses" menu option in TurboTax

2. Find "Less Common Income" and then "Miscellaneous Income, form 1099-A, 1099-C and edit that entry

3. On the next screen click on "Other Reportable Income" 

4. You will find an option to type in a description of your adjustment and you will enter your exempt income as a negative amount 

Thus, the income will go in as pension income and then be cancelled out by an equal negative adjustment on your form 1040.

I hope this has been helpful, and I really appreciate your service!