After I retired, the VA withheld my disability payment for 2018. The amount withheld isn't deducted on my retired 1099R. How do I deduct the VA withhold from my income?

[Bender07]

The VA completed my disability claim after I received my 1099-R.  The letter from the VA states "Because VA compensation is not taxable, you may be entitled to a tax exemption during the period the VA withheld your compensation; the amount of the exemption would be the amount of compensation the VA withheld based on your receipt of military retired pay."  Can I adjust my military retired pay 1099-R to account the amount withheld?  If so, how do I do that and what evidence do I need to show to the IRS that the adjustment is appropriate?

[Critter]

Do NOT change the 1099-R amounts in the program ... if the same amounts are not reported to the IRS than they get from the payer then you will get a letter in a couple of years. So you should first review the 1099-R issued and if it is incorrect then request a corrected form be issued.

[Carl]

There is a specific procedure for your situation that is required by the IRS. Just understand that you can not e-file. If you want the tax-free income, you *have* to do it the IRS way if your VA disability was retroactive to a period of time before the offset reduced your pay from DFAS. See this link for what you have to do.

https://www.irs.gov/individuals/military/special-tax-considerations-for-veterans

Note the information assumes a prior year return that you would amend. You will "NOT be amending your 2018 return, since you haven't filed it yet. Just follow the procedure and requirements and mail your completed return along with the required documentation to the IRS to support your "changes" to the 1099-R DFAS issued you, and you'll be fine. Note that you should send your return to the IRS using certified mail, return receipt required. (that's *required*, not requested.)

Otherwise, if the IRS says they didn't get your paperwork and you can't prove otherwise, you lose.

[Critter]

If this happened in 2018 then I would ask for a corrected 1099-R if possible ... if not then follow Carl's directions.

[Carl]

From my understanding from a conversation I had on the phone back in 1999 when I did this, since DFAS actually did pay the money, they are not going to change the 1099-R as it would not be legal for them to do so. It would also mess up their own accounting books since they did "in fact" pay the money from their funds, and not from VA funds. The IRS procedure allows DFAS to keep their books straight, while giving the taxpayer the tax relief they are legally entitled to.

[Bender07]

Thanks for the answer Carl.  To follow-up, does turbotax prompt me to make the changes in my income as I didn't see exactly where to make these changes in my 1040.  Is it easier to file a 2018 1040 w/o the VA withhold then submit a 1040X with the withhold included?

[Critter]

You can enter the 1099-r as printed then make a negative Sch 1 line 21 entry for the amount not taxable which will negate the earlier entered amount ... you will still need to mail in the return with the explanation attached.

• Click the Federal Taxes tab ( Personal in the Home & Business version)
• Click Wages & Income. (Personal income in the H & B version)
• On the screen "Your 2018 Income Summary," scroll all the way down to the last section, "Less Common Income."
• Click the Start or Update button for the last topic, "Miscellaneous Income, 1099-A, 1099-C."
• On the next screen, "Let's Work on Any Miscellaneous Income," scroll down and click the Start or Update button for the last topic, "Other reportable income."
• The next screen asks, "Did you receive any other taxable income." Click Yes.
• On the next screen, "Other Taxable Income," enter a description and the amount. Click Continue.
• On the next screen click Done.
The income will be reported on Form 1040 line 21 with the description that you entered.

[Carl]

Thanks critter. I was just about to do the research in TTX 2018 to figure it out with all the new schedules and everything, and see you've already done it. 🙂

[Critter]

Yeah well the Sch 1 has all the missing lines from the first page of the old 1040 and line 21 is still valid.

[Bender07]

Thanks for the help and advice Critter.  I appreciate it!