Some veterans who received disability severance payments after Jan. 17, 1991, and included that money as income when they filed their tax returns now are due refunds.
The former military members have known since February that they were due money. Now the process of getting it has finally begun.
But Uncle Sam isn't automatically sending former troops any cash due from the erroneously taxed payments.
The veterans need to file an amended tax return using Form 1040X to claim a disability severance payment-related credit or tax refund.
Why now? If the vets paid too much tax almost three decades ago, why are they just now being told of the mistake?
The reason is the enactment of the Combat-Injured Veterans Tax Fairness Act, which became law on Dec. 16, 2016.
Federal law prohibits taxation of one-time lump sum disability severance payments made to veterans who suffer combat-related injuries.
The Department of Defense (DoD), however, improperly withheld taxes on these payments from thousands of veterans, many of whom did not realized their payments were improperly reduced by the taxes. In other instances, affected vets reported the payments as income.
The injured veterans law extended the time that these affected veterans could file for refunds related to the improperly tax benefits.
One-year vs. three-year deadline: In most cases, the Internal Revenue Service accepts amended returns only within three years of the original tax filing.
However, the injured veterans law grants these taxpayers an alternative timeframe. They can correct their earlier filings within one year from the date they receive a letter from the DoD notifying of their potential tax overpayment on disability benefits.
The Defense Department now is sending these required letters to more than 130,000 veterans.
The letter will have information on how to claim the tax refunds to which they are entitled. It also covers a simplified method for making the claim.
Note, though, that this doesn't mean you'll get back an amount equal to the disability payment.
Any refund or credit you're due will be based on each veteran's individual tax circumstances for the year of the erroneously taxed payments. This includes any other income received and tax payments you made in the year your disability amount was paid.
Still, regardless of how much it will be, it is your money, not Uncle Sam's, so you need to get it back.
Simplified claim amounts: Veterans who wish to file a tax overpayment claim based on the actual amount of their disability severance payment should follow the 1040X instructions in filling out that form.
Or vets can use a simplified method. In these cases, veterans can choose to claim a standard refund amount based on the tax year in which they received the severance payment. Those amounts, which should be entered on line 22 of the 1040X, are:
- $1,750 for tax years 1991 through 2005
- $2,400 for tax years 2006 through 2010
- $3,200 for tax years 2011 through 2016
All three of those dollar amounts are this week's By the Numbers honorees.
Be sure to also write “Disability Severance Payment” on the amended return's line 15 where it asks for the "other" reason for making the claim.
If you have all your filing documents and back-up material from as far back as 1991, you can use that to file Form 1040X in the usual way.
But for most veterans, it will be easier to claiming the standard refund amount for the erroneous taxation many years ago of their lump-sum disability severance payment.
A few other steps: When you file for your tax overpayment attributable to disability severance payments, write either “Veteran Disability Severance” or “St. Clair Claim” across the top of the front page of Form 1040X.
St. Clair refers to refers to the 1991 federal court decision that disability severance pay received for personal injury resulting from active service in the armed forces is not taxable income. St. Clair often is referenced in letters issued by DoD to those whose payments were erroneously taxed.
And yes, I typed write because, for now, all amended returns must be completed by hand and snail mailed to the IRS.
As for that mailing, send your completed Form 1040X and a copy of your DoD letter, to:
Internal Revenue Service
333 W. Pershing Street, Stop 6503, P5
Kansas City, MO 64108
No letter, no problem: If you're a veteran eligible for a refund but didn't get a DoD letter, you still can file an amended return claim your money.
However, you must include both of the following to verify the disability severance payment:
- A copy of documentation showing the exact amount of and reason for the disability severance payment, such as a letter from the Defense Finance and Accounting Services (DFAS) explaining the severance payment at the time of the payment or a Form DD-214 and
- A copy of either the VA determination letter confirming the veteran’s disability or a determination that the veteran’s injury or sickness was either incurred as a direct result of armed conflict, while in extra-hazardous service, or in simulated war exercises, or was caused by an instrumentality of war.
If you don't have that documentation and didn't get a DoD letter, contact the Defense Finance and Accounting Services (DFAS) to obtain the necessary proof.
You also might find these items of interest:
- A salute, shout out and checklist for U.S. veterans
- Don't overlook state tax breaks for military personnel
- Special tax rules for military service men and women