During July 2018, DFAS and the IRS sent letters to approximately 130,000 separated military members who had received disability severance pay as income and with federal tax withholding applied.
In accordance with IRS’s current policy, IRS agreed to forward these letters to separated members on behalf of DFAS because DFAS does not have current addresses for individuals affected by the new law. The IRS has not disclosed address or any other tax information to DFAS.
A small number of potentially affected individuals do not have mailing address information available to the IRS. Veteran and retiree organizations are being asked to share this information with their membership to inform their members who received disability severance pay so they will be able to take advantage of the IRS instructions below and recover withholdings which are now considered non-taxable.
Eligibility to file an amended federal tax return to receive a refund from the IRS depends on the circumstances of your separation.
Disability Severance Pay is not taxable or subject to federal income tax withholding for members meeting 1 or 2 below:
1. You have a combat related injury or illness as determined by your military service at separation that:
- Resulted directly from armed conflict; or
- Took place while you’re engaged in extra-hazardous service; or
- Took place under conditions simulating war, including training exercises such as maneuvers; or
- Was caused by an instrumentality of war.
2. You are receiving VA disability compensation or you have received notification from the VA approving such compensation.
STATUTE OF LIMITATIONS
The amount of time for claiming these tax refunds is limited. However, the law grants veterans an alternative timeframe – one year from the date of the letter from DoD. Veterans making these claims have the normal limitations period for claiming a refund or one year from the date of their letter from the DoD, whichever expires later. As taxpayers can usually only claim tax refunds within 3 years from the due date of the return, this alternative time frame is especially important since some of the claims may be for refunds of taxes paid as far back as 1991.
If you believe you are eligible for or would like to request a refund of taxes, you must seek a refund from the IRS by following the IRS’s instructions below.
WHAT TO DO
Complete and mail IRS Form 1040X, Amended U.S. Individual Income Tax Return, for the year you received Disability Severance Pay, along with a copy of this letter (See note below), to the IRS’s Kansas City address at:
Internal Revenue Service
333 W. Pershing Street, Stop 6503, P5
Kansas City, MO 64108
NOTE: Veterans eligible for a refund who did not receive a letter from DoD may still file Form 1040X to claim a refund but 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.
ATTENTION: Veterans that did not receive the DoD letter and do not have the required documentation to file a claim for refund should contact the National Archives, National Personnel Records Center, or the Department of Veterans Affairs.
You can submit a claim based on the actual amount of your Disability Severance Pay by completing Form 1040X, and following the instructions carefully. Don’t request a refund based on the actual amount if you have previously done so.
You can choose instead to claim the standard refund amount listed below that reflects the year you received your Disability Severance Pay. Simply write “Disability Severance Pay” on Form 1040X, line 15, and enter the standard refund amount listed below on line 15, column B, and on line 22, leaving the remaining lines blank.
- $1,750 for tax years 1991-2005
- $2,400 for tax years 2006-2010
- $3,200 for tax years 2011-2016
Claiming a standard refund amount is the easiest way to request a refund because it doesn’t require you to find your original tax return or ask the IRS for information from the return. This may be larger or smaller than the refund based on the actual amount from your return. You can submit a claim for the standard refund amount even if you already filed a claim for the actual amount. If you do this, you can only claim the difference between the standard refund amount above and the amount you previously claimed that was attributable to Disability Severance Pay.
HOW TO FILE YOUR CLAIM
Please write either “Veteran Disability Severance” or “St. Clair Claim” across the top of the front page of the Form 1040X that you will be submitting and provide an explanation in Part III of why the Disability Severance Pay is not taxable to you.