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:
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.
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.
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:
If you have questions about how your military retirement pay and compensation benefits work, please call the Berry Law Firm 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.
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
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