How to Recoup Taxes Paid on Disability
Severance pay From the Armed Forces
Many medically discharged vets, including some good friends of mine, don't know they are entitled to get the taxes back if they get a VA rating. The one's who do know they are entitled (like I did) don't know how to go about doing it. If I can spare anyone what I went through trying to figure it out, its worth it.
Dorothy
IRS publications 17 (Your Federal Income Tax) & 525 (Taxable & Non-taxable Income, page 17) both state that “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.” But neither publication says how.
Who is eligible?
According to page one of an information paper published online by the Presidio of Monterey Staff Judge Advocate, veterans who have:
a designation of 10 a, b, or c on DA Form 199 (findings from the Physical Evaluation Board). The rest of this page will deal with the last situation -
a retroactive disability determination from the VA. (Information Paper). This last one means the VA has awarded a disability rating for the same condition for which someone is discharged.
This paper has limitations, and it is difficult to read. It basically states that the veteran needs to:
Get a VA disability rating for the same condition for which they received a discharge.
Request a corrected W-2 from DFAS indicating the non-taxable income.
Use that corrected W-2 to file a 1040X for said year. The IRS will return the overpayment of taxes.
But, DFAS will not issue a corrected W-2 indicating this non-taxable income unless the request is made within the same year as the original W-2 was issued. Most veterans know it is almost impossible to get a VA disability rating in less than a year.
How to get back your taxes paid on lump-sum disability severance pay:
Once you have a retrograde VA disability rating:
Fill out a 1040X subtracting the lump-sum disability payment from your taxable income. Make reference to Publication 525, Taxable & Non-Taxable Income.
Attach the following documentation:
a. The enclosed explanation letter, addressed to your IRS Regional Service Center.
b. A copy of your VA disability award documentation.
c. A copy of your separation orders.
d. A copy of your DD-214 (does not have to be notarized)
e. A copy of your original W-2 from the year the taxes were paid.
f. A copy of your federal tax return from the year the taxes were paid.
Here's a sample letter in which you can put your name, address, and other information: Click Here.
On the top of each page in the packet, write:
a. Your full name
b. Social Security Number
c. The phrase “St. Clair vs. the United States.”
Mail this packet to your IRS Regional Service Center. The address for each is in Publication 17, or online at www.irs.gov.
Note: The 1040X generally must be filed within 3 years of the original tax return. There are some exceptions, see your local IRS office or the instructions for Form 1040X. Once the tax refund is paid, your state taxes may be re-filed. Procedures vary by state.
I apologize for any inaccuracies in the above. I put it together using my own recent experience, online research, and innumerable phone conversations I wouldn’t wish on anyone.
--Dorothy
Reference List
Information Paper. Retrieved June 16, 2008, from http://pom-ima.monterey.army.mil/sites/installation/sja/taxes/Disability%20Severance%20Pay%20Tax%20Refund.pdf. (pp. 1-8).
Internal Revenue Service. (2007). Your Federal Income Tax for Individuals. Publication 17. (p.50).
Internal Revenue Service. (2007). Taxable and Non-Taxable Income. Publication 525. (p. 17).
Allan B. Colombo
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