Retroactive VA Disability Tax Implications?

[ThomKat]

I recently received a retroactive VA determination.  This is cut from page 18 from IRS pub 525.  It looks like since they withheld a large amount of my disability compensation they are allowing us to reduce my previously filed retirement income that was taxed?

Any advice is greatly appreciated.

Pub 525:
Retroactive VA determination. If you retire from the U.S. Armed Forces based on years of service and are later given a retroactive service-connected disability rating by the VA, your retirement pay for the retroactive period is excluded from income up to the amount of VA disability benefits you would have been entitled to receive. You can claim a refund of any tax paid on the excludable amount (subject to the statute of limitations) by filing an amended return on Form 1040-X for each previous year during the retroactive period. You must include with each Form 1040-X a copy of the official VA determination letter granting the retroactive benefit. The letter must show the amount withheld and the effective date of the benefit. If you receive a lump-sum disability severance payment and are later awarded VA disability benefits, exclude 100% of the severance benefit from your income. However, you must include in your income any lump-sum readjustment or other nondisability severance payment you received on release from active duty, even if you're later given a retroactive disability rating by the VA. Special statute of limitations. In most cases, under the statute of limitations a claim for credit or refund must be filed within 3 years from the time a return was filed. However, if you receive a retroactive service-connected disability rating determination, the statute of limitations is extended by a 1-year period beginning on the date of the determination. This 1-year extended period applies to claims for credit or refund filed after June 17, 2008, and doesn't apply to any tax year that began more than 5 years before the date of the determination.

[SusanY1]

Yes, that is correct.  If payment was made to you from the VA that is determined to be tax-free after you have already file your tax return and paid your tax, you may file a Form 1040X for that year to remove the taxable income. 

As the publication indicates, be sure to attach to your 1040X the disability determination letter.  

You normally have 3 years from the date a return was due to claim an additional refund.  However, if your determination goes back further than this, you have a year from the date of the determination to file for a refund.  (In other words, take care of this within the next few months for the best results.) 

Here is a link to some helpful information about how to file amendments using TurboTax: How to Amend a Tax Return in TurboTax.

Thank you for your service!

[ThomKat]

Thank you Susan:-)

1.  It is retroactive back until 2012.  Can I amend back that far?

2.  What do I do about 2019 since i have not filed our taxes yet?  Just deduct it?  Or maybe i need to get a new 1099r?

Thanks again!