Income question concerning IRS Publication 525 and a retroactive VA disability determination

[Mickeyjoe]

Good day!  I am a retired service member with an initial VA Disability rating of 70% which entitles me to receive Concurrent Receipt of Retired and Disability Pay (CRDP).  On 09 Feb 2024 I received a retroactive service-connected disability determination which changed my rating to 90%, however I am being paid at the 100% rate due to the VA's determination of individual unemployability.  This new rating was made retroactive to September 2022.  The VA letter contains a table which shows the amount withheld for each month of 2023.  I am at the income section in Turbotax and my question concerns the "less common income" section.  Under IRS Publication 525 pages 61-62, it says that I can deduct the amount withheld from the chart from my 2023 income.  Could someone help me out with the interpretation of this quagmire?

Thanks in advance!

Mike

[AmyC]

You can file an amended return for 2022 to reduce the taxable income from September through December. For 2023, you will use the current rating to exclude VA disability from what was pension income. The 90% disability allowed 100% rating as disability pay if I am reading you correctly. 

You are in other income section for what reason? What forms did you receive? Do you have a 1099-R or  another form or just paperwork? Are you trying to add income or deduct income? You need to deduct taxable income from what was paid but perhaps your forms are correct at this point.  What forms do you have and do they show the full amount received as taxable?

Pub 525 ends with page 44 this year so I am not sure what you are seeing. The Armed Forces Guide offers help on pages 8 and 9.

Pub 525 page 19 states;

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.

Generally, the VA determination letter will contain a table with five headings. The table on the letter must cover the same dates for the tax year reported on the Form 1040-X. To calculate the correct tax reduction, multiply the Effective Months by the Amount Withheld for the tax year.

For example, Form 1040-X filed for tax year 2020. The table shows the Amount Withheld effective December 2019 is $320.00. To calculate the amount for the tax reduction, multiply the 2020 Effective Months by the Amount Withheld. In this case, January–December (2020) is 12

months x $320.00 (Amount Withheld) = $3,840.00; this amount should be the amount claimed as a reduction on Line 1 Adjusted Gross Income (AGI), Column B, of the 2020 Form 1040-X.

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.

If you have questions regarding your situation, see DFAS retirement military and disability help here.

[Mickeyjoe]

Thank you so much for answering my post!  I retired from active duty in 2009 where I was given a 70% service- connected disability rating.  Because I am over 50% disabled, I receive Concurrent Retired and Disability Pay (CRDP) which allows me to receive my full retirement and full disability.   My disability rating was recently raised to 90% with an "Individual Unemployability" determination which pays me at the 100% rate and is retroactive to September 2022.  I also received a determination letter from the VA which shows my higher disability rating and has a table which shows the amount withheld by month. The reason I was in the other income section was to see if IRS Pub 525 applied to my situation.  I have read the publication concerning the retroactive disability determinations and how to apply it to my taxes, but it says nothing about taking CRDP into account, so my question is does it apply in my situation?  If so, then I would just use the amounts listed as withheld on the determination letter, correct?  AmyC, I truly do appreciate you taking the time to help me with my question.

Mike Johnson

[DMarkM1 · Accepted solution]

Under Concurrent Retirement and Disability Pay (CRDP) you have been receiving all of your taxable service retirement pay and non-taxable VA disability pay concurrently.  With the new disability rating only your non-taxable VA disability changed (increased).  

Since prior to and after the rating change none of your taxable service retirement pay was offset there is no adjustment needed on your tax return.   

[Mickeyjoe]

Thank you so much for getting back to me!  I had a suspicion that there was no adjustment required, but wanted to get the straight answer.  Thanks again!