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Disability severance pay military

I was medically separated from the military and my severance pay was taxed. The VA rated my disability therefore my severance pay should not be taxed? How do I file accordingly to recoup my taxed severance pay?
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Disability severance pay military

You can recoup the taxes DFAS withheld on your disability severance pay. Unfortunately the process is a bit involved, but remember this involves both DFAS and the IRS.

If you receive a lump-sum disability severance payment and are later awarded VA disability benefits, you can exclude 100% of the severance benefit from your income  (under the provisions of 26 USC 104, see also Publication 17 (2015), Your Federal Income Tax).

In order for the money to become tax-free, you must have a VA rating for the same disability that led to your separation.

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 request the tax money back from the IRS. If you haven’t filed your tax return for the year in which you received the disability severance, you can make the correction on the current tax return. If you have already filed your tax return for the year in which you received the disability severance, you will have to file an amended return. You have three years from the date the original return was due (including extensions) or filed (if later than the due date) to amend your return. In both cases, you enter the correction in the same place.

Go to the Other Reportable Income interview, the very last interview in Wages and Income (Federal Taxes tab > Wages & Income category > Less Common Income subcategory > Miscellaneous Income sub-subcategory). Enter the full amount of your severance pay (i.e. not reduced by the income taxes withheld) as a negative number (use "minus" sign).

This will tell the IRS that you are subtracting that amount from your income. Describe the entry as Military Severance Reclassified as Disability (see sample screenshot).

You MUST send in the supporting documentation listed below, with your return. If correcting this in the same tax year the payment was received, you will have to print and file the tax return by mail; amended returns always have to be mailed.

Paperwork you will need for either option.

·  Unless this is the first tax filing since getting the severance pay, you need to include a copy of the Individual Federal Tax Return for the year in which you received your severance pay. 

· Original IRS Form W-2 (some say you can get a corrected W-2 from DFAS, but that is either not possible or not worth the effort or delay).) 

· VA award documentation 

· Separation orders 

· DD Form 214 stating your severance pay amount before taxes

If you are amending a prior year return, include a cover letter ("St. Clair" letter). A sample format is attached. 

 Send copies with your return to the IRS; send certified mail, return receipt requested to the address listed in your TurboTax filing instructions.

(If you encounter any issues, please update this post with a "Comment" and provide details).

Finally, if you are amending for previous tax years, don't forget your state returns - they probably have some of your money, too!

 

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39 Replies
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Disability severance pay military

If you can, please edit the subject of your question to "Military Disability Severance Pay", This will help others with the same problem to find these instructions.
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Disability severance pay military

It will not let me enter the payment in parenthesis. The screenshot below is outdated. Is there another way to enter this?
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Disability severance pay military

I've made a minor update. Just enter as negative number, using a minus sign. I've added a 2016 screen that shows it works. I used the 2014 screen before because I only have 2016 Self-employed.
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Disability severance pay military

Thank you. I will try that. I tried the old direction and it would not let me enter a negative number. It stated enter a value between 0 and something.
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Disability severance pay military

I just tried it this morning, so if you run into a problem, let me know.
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Disability severance pay military

I'm pretty sure I was entering it the wrong section. I now entered it in Miscellaneous Income, 1099-A, 1099-C and it looked very close to the screen shots and it allowed me to enter a negative number and my refund jumped way up and now looks correct. Thank you for the help.
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Disability severance pay military

Glad I could help!
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Disability severance pay military

Is there nothing that needs to be done on the state return for this?
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Disability severance pay military

Good point. If amending, the state return should change as well but I should emphasize that in an edit tomorrow. If doing it in the current tax year, it should flow automatically
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Disability severance pay military

The St. Clair sample attached has incorrect content.
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Disability severance pay military

Fixed, thanks!
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Disability severance pay military

You can recoup the taxes DFAS withheld on your disability severance pay. Unfortunately the process is a bit involved, but remember this involves both DFAS and the IRS.

If you receive a lump-sum disability severance payment and are later awarded VA disability benefits, you can exclude 100% of the severance benefit from your income  (under the provisions of 26 USC 104, see also Publication 17 (2015), Your Federal Income Tax).

In order for the money to become tax-free, you must have a VA rating for the same disability that led to your separation.

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 request the tax money back from the IRS. If you haven’t filed your tax return for the year in which you received the disability severance, you can make the correction on the current tax return. If you have already filed your tax return for the year in which you received the disability severance, you will have to file an amended return. You have three years from the date the original return was due (including extensions) or filed (if later than the due date) to amend your return. In both cases, you enter the correction in the same place.

Go to the Other Reportable Income interview, the very last interview in Wages and Income (Federal Taxes tab > Wages & Income category > Less Common Income subcategory > Miscellaneous Income sub-subcategory). Enter the full amount of your severance pay (i.e. not reduced by the income taxes withheld) as a negative number (use "minus" sign).

This will tell the IRS that you are subtracting that amount from your income. Describe the entry as Military Severance Reclassified as Disability (see sample screenshot).

You MUST send in the supporting documentation listed below, with your return. If correcting this in the same tax year the payment was received, you will have to print and file the tax return by mail; amended returns always have to be mailed.

Paperwork you will need for either option.

·  Unless this is the first tax filing since getting the severance pay, you need to include a copy of the Individual Federal Tax Return for the year in which you received your severance pay. 

· Original IRS Form W-2 (some say you can get a corrected W-2 from DFAS, but that is either not possible or not worth the effort or delay).) 

· VA award documentation 

· Separation orders 

· DD Form 214 stating your severance pay amount before taxes

If you are amending a prior year return, include a cover letter ("St. Clair" letter). A sample format is attached. 

 Send copies with your return to the IRS; send certified mail, return receipt requested to the address listed in your TurboTax filing instructions.

(If you encounter any issues, please update this post with a "Comment" and provide details).

Finally, if you are amending for previous tax years, don't forget your state returns - they probably have some of your money, too!

 

View solution in original post

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Disability severance pay military

Has anyone filed a claim at the state level with the St. Clair Claim.  If so, did you get interest awarded on your claim?  I'm in Nebraska.

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Disability severance pay military

I was medically discharged from the Air Force September 27th of this 2019. I received a total of 40% for disability. I also received severance pay. I know that I qualify to get back my taxes that were taken from my severance pay. However, I tried to call the numbers provided with no luck. I would like to take care of it prior to the end of the year. Any help? I would greatly appreciate it! 

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