I am in the same boat looking into this topic. Initially I agreed with the premise that Military Retirement based off years of service is taxable and VA disability compensation is not. However, a friend of mine who also is retired, told me that his retirement is NOT being taxed as is his VA not being taxed. He sent me the packet he sent to DFAS. After reading through it, AND the appropriate tax law, the IRS gives a VERY SPECIFIC example of where BOTH should be tax free. This is listed as Example 19 from the IRS Publication 525, page 19. Not sure that it gets much clearer than this...
Example 19. You retired in 2014 and receive a pension based on your years of service. On August 3, 2020, you receive a determination of service-connected disability retroactive to 2014. Generally, you could claim a refund for the taxes paid on your pension for 2017, 2018, and 2019. However, under the special limitation period, you can also file a claim for 2016 as long as you file the claim by August 3, 2021. You can't file a claim for 2014 and 2015 be-cause those tax years began more than 5 years before the determination.
Thoughts from the group?
