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Getting back your disability severance pay taxes
Neo1130  [Team Member]
DISCLAIMER: I am not responsible for any legal or financial problems that may occur from the listed issue. I am NOT a tax expert nor am I a military finance expert. I am just a disabled veteran out there that has been through this process. However, if you would like any help I am willing to do what I can to assist you and get you on the right track.

The purpose of this post, is to inform those veterans which were awarded with a MILITARY disability percentage of 30% or less and received a severance pay for those disabilities, of a possible return of taxes from the severance pay. You must be awarded with a VA disability rating for the taxes to be returned. Also the disability must be service connected or aggravated by your service which will be designated on your MEB rulings under 10a, b or c. One of those boxes must be checked.

So, upon discharge after going through a medical evaluation board, you find out that that nice lump sum, which was calculated by your BASE PAY x 2 x # years served, was taxed at a whopping 28%!

*Lets just say you were an E-6 with 10 years service, at time of discharge in 2008. 2,930.40 x 2 x 10 = $58,608 x 28% = $16,410.24
$16,410.24 of YOUR money!

Now, the reason that DFAS taxes your money, is because technically it is NOT a disability payment, yet... Therefore, it is taxed at the regular severance pay tax rate. In order for the money to become tax-free, you must have a VA rating for the same disability in which you got the medical boot for... Example... If you got a 20% rating from the military for a back problem and were then awarded 20% or more for the same disability from the VA, you qualify. This is all under 26 U.S.C. § 104. The US code says that any pay received for disability is tax free.

There are TWO ways to get your money back, but you must make sure you use the right one...

1. You can get the money back from DFAS if you act in time. You do this by calling the Separation and Reenlistment Division at DSN 699-7731/7027/6129/6142 or commercial 317-510-7731/7027/6129/6142. However, this can ONLY be done before 31 December in the year you receive the severance payment, but no sooner than 20 business days of receiving payment. After December 31, the taxed money goes to the IRS, so you must use option number 2.

2. If you did not meet the deadline in the above option, then you must request the tax money back from the IRS. Depending on whether or not you want to use a professional tax service or do your taxes yourself, I will let you know how to go about both.... (You have three years to claim this money back from date of severance pay receipt, or else I am sorry to say, you're screwed.)

Paperwork you will need for either option.

· Individual Federal Tax Return for the year in which you received your severance pay (N/A if this is the first tax filing since getting the severance pay)
· Original IRS Form W-2 (some say you can get a corrected W-2 from DFAS, but that is false)
· VA award documentation
· Separation orders
· DD Form 214 stating your severance pay amount before taxes

You will either give a copy of these papers to the tax professionals or send copies with your return to the IRS.

· If having a tax professional prepare your taxes, if they are unsure, ask them to go to their "Other Income" menu and if it is a quality service, they *SHOULD* have an option for Disability Severance Pay. If not, make sure they input the severance pay amount so it will show as a NEGATIVE number on your 1040.

· If doing the taxes yourself, on the line under your income, there will be a line that you can input "Other Income" and should be towards the bottom of the income section. You will write in the number of your severance pay in parentheses. Sample from above: (16,410.24) That will tell the IRS that you are subtracting that amount from your income. You MUST send in the supporting documentation listed above, with your return.

One last part... I would send some sort letter to the IRS explaining what you are doing. I will provide my example below.

February XX, 20XX




Dear Sir/Ma’am:

I was medically discharged from the (Branch of Service), on (DISCHARGE DATE), under honorable conditions. I was awarded severance pay in the amount of $xx,xxx.xx, which was taxed at twenty-eight percent (28%). I have now received a disability rating from the Veterans Affairs (VA) for the same disability for which the Air Force compensated me.

Under the provisions of 26 U.S.C. § 104(a)(4), and 26 U.S.C. § 104(b)(2) (D), as interpreted by the District Court in St. Clair vs. United States, disability severance payments are amounts received for personal injury(ies) and are thus excludable from taxable income. Therefore, I request a refund of taxes withheld in year 2008, the year in which I received my severance pay.

I am submitting the following documentation to demonstrate that I am eligible for a refund of all taxes withheld.

•Individual Federal Tax Return for the year 2008 (year that severance pay was received)
•Original IRS Form W-2
•Separation orders
•DD Form 214
•VA award documentation

Please contact me if you require any further information. My current phone number is (xxx) xxx-xxx. I currently reside at the address listed above.

Your prompt attention to this request is appreciated.


Your Name Here
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CommoGunSlinger  [Team Member]
TAG... for future trip down this road!
redleg637  [Team Member]
Went through that bullshit back in 2001. It was a pain in the ass but got all my money back.
pbrsailor  [Member]
I would have to go back to my 1985 return to get the tax refund. I am not optimistic.
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Orion67  [Team Member]
Wish I had known this in 05, when I got my check. The V.A. rated me at 40% in 06, 60% in 08, and finally 100% in 09. When does the 3 year mark end, 3 years after the check or 3 years after your final rating?
chumpmiester  [Member]
When I got out back in 96, the finance office at Fort Irwin gave me a copy of a court case where a service member sued to get the taxes on his medical severance pay refunded. All I had to do was submit that with my tax returns and got all of it back. I don't remember the exact court case anymore.
phroste  [Team Member]
Man I wish I had this info back in '06. I was double dipped on my severance pay. I was Sgt. in the Marine Corps when I was separated back in '06 at %20 after being injured in Iraq and have my lower spine fused L4-S1. My severance was something like $16,000.00 and was taxed for $4480.00 so I only saw around $11,000 of it. When I filed for taxes they refused to refund any of the money I was taxed on and the CPA that did my taxes had no idea what to do. EVEN THOUGH, they withheld all of my VA disability checks until the full $16,000 was paid back in full. So I received $11,000, but had to pay back $16,000 and never saw any of it, 7 years later and I'm still pissed off about it.
NMB2  [Member]
Nobody told me I could get the tax for my severance back like they supposedly were supposed to.

Just went through this last week after filing taxes and thinking this was a fucked up system.

My ETS was 13OCT12, I was medboarded as an E5 @ 30%.. so I paid like 5k in tax.

If you submit your DA199, VA Award, dd214 member 4 copy, and sep orders. Fax it to DFAS @ 317-275-0248

Now, if I would of submitted this before 31Dec12 (same calender year) DFAS will refund you via direct deposit. Beings I waited til after then, and DFAS already gave the money to the IRS, you still submit like I said, but you will get a corrected W2 through mypay, for you to submit to the IRS yourself.

Hope this helps.
wolfdesignz  [Member]

Did you separate the Military in the last year under Medical separation (MEB) and received a severance check that was taxes at 28%? I recently discovered the most recent process for getting your TAXES back to you and its not through the IRS.

Here is a link to the DFAS site that explains the process, provides the forms and the information that is required.

I have overnighted the forms and emailed the forms as of 1 Sept 2014, I will keep the group posted on my experience and timeline of repayment.
NavyIS2  [Team Member]
Anyone have any updates to this? I mailed mine in October and then again at the beginning of December. Haven't heard anything back. The numbers all listed for this department aren't correct anymore, and I can't get the automated system to let me talk to a person to request this department. Does anyone have any updated contact info?
NavyIS2  [Life Member]
Finally heard back from them this month. They issued a corrected W2 for me to get the taxes back so all should be good now. It only took them 5 months to get back to me.
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