Where do I deduct income from taxable (1040 line 10b) to non-taxable related to the IRS Strickland Decision? This is for TY2023 and I have not filed yet. No help in 525.

[bungyjumper-dan]

This is specific to my military retirement pay and the VA's retroactive assessment of disability. I know how to do the prior years, just need to know how to deal with this current filing season before I file. Thank you.

[DMarkM1 · Accepted solution]

You can enter the amount of 2023 retirement pay that was reported on your Form 1099-R as taxable income, but which subsequently became non-taxable under IRS Revenue Ruling 78-161, in the Wages and Income section using the “Less Common Income” topic.  Here is an IRS reference letter affirming the Strickland Decision.
 

First, you will need to do the calculations based on your situation: 
 

1. Note the month the Veterans Administration (VA) payments should have started according to the VA
2. Note the amount of new monthly VA payment
3. Subtract old VA payment, if applicable, to get the difference 
4. Note the month when Defense Finance (DFAS) actually started taking the correct offset from your retired pay
5. Multiply the number of months the VA offset wasn’t taken out of your pay times the monthly offset (or difference from old payment); this will be the non-taxable number

Next, if you haven’t already, in the Wages and Income section using the “Retirement” topic enter the 1099-R information for your military retirement just as your form 1099-R reads.

Finally, you will enter the non-taxable amount you calculated earlier as a negative (-) number using the “Less Common Income” topic with these steps:

1. Click Wages & Income in the left hand menu
2. Scroll down to the “Less Common Income” topic and open the dropdown menu
3. Scroll down to “Miscellaneous Income” and click Start
4. Scroll down to “Other Reportable Income” and click Start
5. Click Yes
6. Enter “IRR 78-161” in the description box
7. Enter the non-taxable amount as a negative (-) number
8. Continue
9. Done

The end result will be line 5 on your 1040 showing the form 1099-R information as received by you and the IRS and the non-taxable income subtracted out as a negative entry on line 8z of Schedule 1 and labeled “IRR 78-161”.  

[bungyjumper-dan · Accepted solution]

Super, thank you very much!  Just did a trial-run on TT Deluxe (not sure if I even need that version, but it's the one I've used for years, so I've just stayed on that one) and it seems to have worked like a charm.  Updated the calculations, etc. and came up with what I did on pen-and-paper trials (simple math runs of add this, subtract that, tax calc this and that, etc., not the actual forms yet). 

Much appreciated, many thanks!  You've made my tax-filing efforts much easier this year.