I know this response is almost a year late, but I wanted to post the answer for any future inquiries. I came across this info from my peers regarding tax exemption on retirement pay. After due diligence as well as confirmation from DFAS, the only way you qualify for this is if you are receiving "Military Disability Retirement Pay." If on the other hand, you are receiving "Military Retirement Pay," then you do still pay taxes on it; therefore, you will still receive a 1099-R at the end of the year. If you were one of those folks that submitted a W-4 form for exemption because you are 100% disabled and receive military retirement pay, you need to resubmit a new W-4 to change it back to where your FITW is getting deducted again.
