Military Retirement Pay and VA Disability Compensation Benefits

In the past, the VA did not allow Veterans to receive full military retirement pay and full VA disability compensation benefits after their time of active duty is complete. For some former military service members, it was necessary either to waive a portion of retirement benefits or waive a portion of disability compensation benefits, but the total amount between the two was always ultimately identical.

In other words, if you had $3,000 in monthly retired pay and $400 in Department of Veterans Affairs disability benefits, you could opt to receive the full lump sum of  $3,000 in retirement pay and $0 in disability benefits, or you could opt instead to receive $2,600 in retirement pay and $400 in disability benefits; either way, you would still be stuck at $3,000 in the end. The only difference is that VA disability benefits are not subjected to federal income taxes, so for tax purposes, the latter option was to a Veteran’s tax advantage.

The rules for concurrent receipt of disability benefits and retirement pay underwent significant changes in 2002, 2005 and 2008 with protection from inflation based on the Cost of Living Adjustment. Through these changes, the U.S. Government now allows Veterans who qualify to receive both VA disability compensation benefits and military retirement pay concurrently in certain situations:

• Military retirees with at least 20 years of service who have a 100 percent service connected disability (under a schedular disability rating or individual unemployability) may receive all of their retirement pay and all of their VA disability compensation benefits concurrently after enrollment. There is no reduction required. 38 C.F.R. § 3.750 ( 2012).
• Retired armed forces members with at least 20 years of service who are 50 to 90 percent service connected are subject to a phase-in process and, according to 38 C.F.R. § 3.750 (2012), will eventually receive full concurrent receipt of both VA disability compensation benefits and military retirement pay starting December 31, 2013.Until this date, however, these Veterans must file a waiver to receive the maximum allowable amount of disability benefits and retirement pay during the phase-in process. 38 C.F.R. § 3.750(c)(1)(ii); 38 C.F.R. § 3.750(c)(3) (A waiver can be “any written, signed statement, including a VA form, which reflects a desire to waive all or some military retired pay. The statement must be submitted to VA or to the Federal Agency that pays the Veteran’s military retired pay.”).
• Retired Veterans who retire based on years of service and are service connected with a “combat-related disability” or disabilities rated at 10 percent or more receive full military retirement pay and the amount of VA disability benefits attributable to the “combat-related disability” or disabilities. 10 U.S.C. § 1413a.
  Veterans who were medically retired from the military under 10 U.S.C. Chapter 61 (regardless of number of years served) and are service connected with a “combat-related disability” or disabilities at 10 percent or more may be able to receive part of their military medical retirement pay and the amount of VA disability retirement plans attributable to the “combat-related disability” or creditable service disabilities. 10 U.S.C. § 1413a.

Military Retirement Pay and Disability Compensation Tax Rules

As noted above, military retirement pay (such as pension awards) is taxable income. That means you need to report this income each year when you file your taxes. If you don’t automatically have taxes and social security deducted from your military retirement paychecks, you’ll have to pay the IRS at the end of the tax year.

However, disability compensation payments are not taxable according to federal regulations. That’s because many Veterans who receive disability payouts require that money to pay for medical expenses and much more. Those Veterans may also face more financial difficulties because of their disabilities or chronic illnesses.

If you get disability compensation pay, you do not need to worry about whether that income is taxable.

Tax Refunds for Disability Backpay

What if you filed a claim for disability benefits but only received those benefits after the fact? In that case, you may have received a massive backpay award later on.

Backpay awards are intended to pay Veterans for disability benefits/compensation they should have received for the duration of their illness or disability but which they didn’t because they waited for the VA to settle their claims status. 

For example, if a Veteran were injured in May 2021 but were only approved for disability compensation in December 2021, they would be owed disability compensation for the months between May and December.

Since disability compensation is not taxable, you may be eligible for a tax refund if you also receive a military pension or retirement pay at the same time. With legal assistants, you can replace your pension income with disability compensation income. This reduces your taxable income in the eyes of the IRS and may allow you to pocket more money.

What Is the Statute of Limitations for Veteran Tax Refunds?

The IRS tax code states that the statute of limitations for claiming standard tax refunds is three years after the time the return is filed. Alternatively, you can claim a tax refund two years after the taxes were paid.

Veterans who have backpay disability compensation awards have different rules. The statute of limitations is three years from the date of determination, meaning the date at which their disability status is determined. 

Furthermore, Veterans of the National Guard, Army, or other branches and their beneficiaries benefit from a five-year statute of limitations when requesting tax refunds if they already paid their taxes.

Let’s take a look at an example to clear this up:

• Bob is an Air Force Veteran, and he has received $400 per month for nine months of basic pay.
• On July 9, 2012, he receives $20,000 in back disability pay for a qualifying back injury.
• According to the statute of limitations, Bob now has three years plus one year to file a claim for a tax refund (four years total). He has until July 9, 2016, to file that claim.
• Furthermore, Bob can file for a refund up to five years before the pay date of his base pay award. That would be July 9, 2007, so he could file for a tax refund in 2008 at the earliest.
• Should Bob take these steps, his military retirement pay could become tax-free retroactively, resulting in him getting a refund check from the IRS.

Contact Berry Law Today

If you have questions about how your military retirement pay and compensation benefits work, please call the Berry Law at (888) 883-2483. Our office specializes in helping Veterans who qualify to get the maximum amount of VA disability compensation benefits available to them.

Sources:

38 CFR § 3.750 – Entitlement to concurrent receipt of military retired pay and disability compensation. | Cornell

10 U.S. Code § 1413a – Combat-related special compensation | Cornell

eCFR :: 38 CFR 3.750 — Entitlement to concurrent receipt of military retired pay and disability compensation. | ECFR.gov

Retired Pay | DOD | Department of Defense 

Defense Finance and Accounting Service |  Retired Military Survivor Benefit Plan | DFAS