I have been paying taxes on my military pension for the past 3 years. I recently found out that I my pension is tax exempt. How do I file a 1040-X to get my money back?

[dannyestep1]

I retired from the Army in 2020. I was then awarded 100% disability from the VA. According to IRS Publication 525, certain military pensions are tax exempt if you were later found to be disabled. I applied for exemption through the Defense Finance and Accounting Service (DFAS), which is where I receive my pension, and was awarded tax exemption in July of this year (2024). Now I am trying to get the money I have paid in taxes back for the past 3 + years. I researched publication 525, and it appears that I can file Form 1040-X to get that money back for the years I paid taxes on my pension. While the IRS has instructions on filling out the form, it is a bit confusing, so I was wondering if anyone had any experience with filling out a 1040-X? Thank you in advance for any assistance you may be able to provide. -Danny

[dannyestep1]

This is basically what I’m reading. I retired based off years of service then was awarded VA disability:

Retroactive VA disability determination

If you retire from the Army based on years of service and are later given a retroactive service-connected disability rating by the VA, your retirement pay is excluded from income up to the amount of the VA disability benefits you would have been entitled to receive. You can claim a refund on any taxes paid on the excludable amount by filling an amended return on Form 1040x for each previous year during the retroactive period (subject to statute of limitations).

You may exclude 100% of any severance benefit from your income if you receive a lump-sum disability severance payment and are later awarded VA disability benefits. However, any lump-sum readjustment or other non-disability severance payment you receive upon your release from active duty must be included in your income even if you are later given a retroactive disability rating by the VA.

[DoninGA]

When exactly did you start to receive VA disability benefits?  Was it just recently?

None of the VA disability benefits paid are taxable nor reported on a tax return.

When you receive VA disability benefits and a military pension during a tax year, only the military pension is taxable.

[dannyestep1]

I started receiving disability pay after retirement. I know it is not taxable. However, the way the IRS publication 525 reads, once you are awarded disability, military pension should be tax exempt as well. DFAS changed my pension to tax exempt last month, I’m just trying to see if I can get all the taxes I paid over the past 3 years back. All they can do is tell me no, right? Lol

[DoninGA]

If you started receiving VA disability benefits when you retired in 2020, then your military pension payment were taxable starting in 2020 and all future tax years.

In Publication 525 there is a good example of when you can claim the pensions received for prior tax years as not taxable - https://www.irs.gov/pub/irs-pdf/p525.pdf#page=19

Example 19. You retired in 2017 and receive a pension based on your years of service.  On August 3, 2023, you receive a determination of service-connected disability retroactive to 2017. Generally, you could claim a refund for the taxes paid on your pension for 2020, 2021, and 2022. However, under the special limitation
period, you can also file a claim for 2019 as long as you file the claim by August 3, 2024. You can't file a claim for 2017 and 2018 because those tax years began more than 5 years before the determination.

Since you have been receiving VA disability benefits for the past three + tax years, 2020 thru 2023, your pension payments are taxable since they do not include any disability payments.  The pension is only based upon your years of service.

Also, I am a Viet Nam veteran but not a retiree.

[dannyestep1]

Yeah, I don’t read it that way, and neither did DFAS when they awarded me tax exemption starting last month. I may not get the money back that I payed in taxes for my pension over the last 3 years, but the publication reads (ad-libbing  using my own words here) “if you retired based off years and were later awarded disability, your pension is entitled to tax exemption”. Both of those statements are true in my case so I’m going to pursue this until the IRS tells me no. Because, why not? 😉

[DoninGA]

Ok...Since you are going to pursue this with the IRS by amending the prior year tax returns, take note of the following statement in Publication 525 on page 19 under Retroactive VA determination

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.

[careybaylor78]

I'm retired from the military and 100% disabled, is this automatic or is there a form to fill out?  How did you get your military retirement pay tax free?

[careybaylor78]

I'm retired from the military and 100% disabled, is this automatic or is there a form to fill out?  How did you get your military retirement pay tax free?

[DaveF1006]

It depends on the nature of your disability. According to Publication 525, you may receive military retirement if you have a service-connected disability. If you have this disability, you need to have a VA determination letter to prove your disability status and eligibility for benefits; this letter outlines the details of your disability rating and the specific conditions considered service-connected. 

If you have the VA determination letter, the portion of your pay received as a result of your disability rating is non-taxable; however, the portion received based on your years of service is taxable. The VA determination letter should state how much of your pay is taxable.   

If you receive a 1099-R from DFAS then the amount reported in box 2a is taxable income. This is assuming the standard distribution code in box 7 of that 1099-R is a 7. If this is the case, your 1099R is reported correctly and you do not need to do anything because of the difference between taxable and non-taxable income is reflected in your 1099R form

Now, if you have a 1099R and boxes 1 and 2a report the same amount, you may make an adjustment to exclude the military pay that you are entitled to exclude as stated in the VA determination letter. If you do this though, make sure you have that letter in case if you are audited by the IRS. Here is how to report.

If the income is not taxable but is still reported on the 1099-R form, you can enter a deduction in the "Other Income" line on your form 1040. 

1. Find the "Income and Expenses" menu option in TurboTax

2. Find "Less Common Income" and then "Miscellaneous Income, form 1099-A, 1099-C and edit that entry

3. On the next screen click on "Other Reportable Income" 

4. You will find an option to type in a description of your adjustment and you will enter your exempt income as a negative amount represented by a minus in front of the amount to be excluded. Give it a description such as Service connected disability allowed by VA determination letter and then the amount with a minus sign in front of it.

Thus, the income will go in as pension income and then be cancelled out by an equal negative adjustment on your 1040. 

One final note, you may be audited if you send in the return electronically. I suggest sending the return by mail and then attach a statement stating why you made the negative adjustment.  you may also attach the VA determination letter as further proof. 

@careybaylor78 

[DARPAT1]

How did you get DFAS to change your 1099 to show exempt?

[RangerVic]

OK, first the different disabilities that are out there. You have military disability. Military disability can be (1) taxed and (2) untaxed. If your disability if found combat/combat related then it is untaxed. If it is just straight up service related it will be taxed. This is all independent of your VA disability. This is true if you retired under years of service (20+). Most would usually go through a medical board but not all and that is what it sounds like in Danny's situation. You did your "medical  board" after the fact. You should already be receiving concurrent receipt. So you should be able to fill your 1040-X if you were awarded tax exemption for all or a portion of your pension. You will have to do the math manually. DFAS techs are not going to help you, and you may not want them to help you. Some have problems with some basic math. 

I was 90% med board combat related retired but my time in service was 85%. Last year they gave me a 1099 for the 10% difference that DFAS retro paid because they initially capped me at 75%, but this year no taxes taken out so i'm not sure what's going on. 

[RangerVic]

100% disability from the Military, not VA, would only be untaxed if it was deemed combat related. If your disability is service connected VA then only that is untaxed.  Usually you would have had to have gone through a medical board or in some cases you made your case to a med board after you retire.