How to claim IRS 525 tax exemption

[shunte_us]

Fed taxes owed but have 525 status for r
Military retirement.  How do i correct tax return?

[ColeenD3]

What are you specifically expecting to happen? 525 refers to an IRS publication that deals with many types of taxable and nontaxable income. Your military retirement pay would be reported on a form 1099-R, like any other retirement pay.

Military retirement pay. PUB 525

 If your retirement pay is based on age or length of service, it’s taxable and must be included in your income as a pension on lines 5a and 5b of Form 1040 or 1040-SR. Don’t include in your income the amount of any reduction in retirement or retainer pay to provide a survivor annuity for your spouse or children under the Retired Serviceman's Family Protection Plan or the Survivor Benefit Plan. For a more detailed discussion of survivor annuities, see Pub. 575. Disability. If you're retired on disability, see Military and Government Disability Pensions under Sickness and Injury Benefits, later.

[Carl]

Assuming your retirement pay is reported on 1099-R, what makes it, or any part of it non-taxable? This is not a rhetorical question. There are valid scenarios where at least a part of it very well could be non-taxable. For example, do you have a letter from the VA awarding you a percentage of your retirement as non-taxable disability pay, and does that letter indicate a retroactive date?

[shunte_us]

Yes I was awarded 100% total and permanent VA disability rating and yearly complete the w4 form and send to dfas to not withhold federal income taxes. Another Turbo tax rep states maybe dfas would have to state on 1099-R taxable imcome line zero or would I have to file an amendment provide my VA disability award letter and IRS section  for the exemption?

[Carl]

Note that you will have to print, sign and mail your return. You do the math to adjust your 1099-R only if the VA award is retroactive, and the 1099-R includes pay that would have excluded from tax.  In your mailing you will need to include a copy of the paperwork from the VA awarding you the benefit retroactive, and the effective date of the tax exempt benefit must be clearly stated in that paperwork. Usually, it's in the actual award letter. While 525 may state it can be "e-filed or mailed", efiling is not an option for you in this case. The IRS want's (requires?) original signatures. So you have to mail it.

Make sure you select the "print and mail" option in turbotax, as the instruction sheet that will print will include the address where you mail the return, along with a list of other documents you will need to include in your mailing. (such as the 1099-R). In addition to the documents listed, also include your VA paperwork awarding you the benefit.

From IRS publication 525:

To do so, the disabled veteran will need to file the amended return, Form 1040-X, Amended U.S. Individual Income Tax Return, to correct a previously filed Form 1040, 1040-A or 1040-EZ. An amended return can be e-filed or filed by paper for most returns. For tax years 2019 and later, a paper filed original return can be amended electronically or by paper. Disabled veterans should include all documents from the Department of Veterans Affairs and any information received from Defense Finance and Accounting Services explaining proper tax treatment for the current year.

Please note: It is only in the year of the Department of Veterans Affairs reassessment of disability percentage (including any impacted retroactive year) or the year that the CRSC is initially granted or adjusted that the veteran may need to file amended returns.

[JimEs]

A few questions,

Based on the 2021 IRS publication 525, section “sickness and injury benefits” subsection “Military and Government Disability Pensions”, following example 19 on the bottom of page 19.

According to the VA, I’m 100% permanent and totally disabled.

Therefore:

• is my military retirement pension no longer reported as income?
• And for prior returns, amend the return by removing my pension from the AGI altogether?
• And for prior returns, following the statue of limitations, can I amend my returns for taxes paid?

“Example 19. You retired in 2015 and re- ceive a pension based on your years of service. On August 3, 2021, you receive a determination of service-connected disability retroactive to 2015. Generally, you could claim a refund for the taxes paid on your pension for 2018, 2019, and 2020. However, under the special limitation period, you can also file a claim for 2017 as long as you file the claim by August 3, 2022”

https://www.irs.gov/pub/irs-pdf/p525.pdf

[DoninGA]

@JimEs Your VA disability payments are not entered on a tax return and are Not included in the Military Retirement income you receive and reported to you on a Form 1099-R.  Your retirement income is taxable income and the Form 1099-R must be reported on your federal tax return.

[JimEs]

I understand that my VA disability is not counted as income. 

However, because of the 525 and subsections I mentioned plus the example, does this rule apply to my retirement pension? I may have to report it as income however, is it not taxable?

I am a 100% P&T Vet. I retired in 2018. My rating was issued in that same year.

and under the exclusions, the below applies to me: 

“4. You would be entitled to receive disability compensation from the VA if you filed an application for it. Your exclusion under this condition is equal to the amount you would be entitled to receive from the VA”

I am entitled. 
my retirement pay is less than the amount I receive from the VA

Therefore, couldn’t my pension be reported but NOT taxed?

[DoninGA]

The welcome letter you received from DFAS when you first retired indicates whether your pay is computed using your military percentage of disability or your years of service.

Military retirement pay based on age or length of service is considered taxable income for Federal income taxes. However, military disability retirement pay and Veterans' benefits, including service-connected disability pension payments, may be partially or fully excluded from taxable income.

Is your retirement pay based on length of service or is it military disability retirement pay?

[Critter-3]

The fed pension is usually fully  taxable and reported on the return ... only the VA benefits are automatically non taxable and no tax reporting form will be issued.   If there was a determination that the reg pension would be reduced because some/all of it is now non taxable  and you have to manually adjust the already issued 1099-R then follow the instructions already posted.  Going forward the 1099-R should be adjusted by the government automatically. 

[JimEs]

Answer: Length of service. 

My VA rating came after my retirement date but the same year. 

It’s important to note, that I submitted paperwork to DFAS a few months ago stating that my retirement is to be tax exempt following 525 and my VA rating.

They approved the change, I’m now receiving my pension without taxes being withheld. 

But, when I called DFAS, they were unsure if the IRS would see it as exempt. Hence the line of questioning. 

and because of the uncertainty, it’s unclear to me how to amend prior returns and recalculate AGI. And going forward how to do the same. 

[DoninGA]

As stated in Publication 525 page 18 - https://www.irs.gov/pub/irs-pdf/p525.pdf#page=18

Service-connected disability. You may be able to exclude from income amounts you receive as a pension, annuity, or similar allowance for personal injury or sickness resulting from active service in one of the following government services.
• The armed forces of any country.
• The National Oceanic and Atmospheric Administration.
• The Public Health Service.
• The Foreign Service.
Conditions for exclusion. Don’t include the disability payments in your income if any of the following conditions apply.
1. You were entitled to receive a disability payment before September 25, 1975.
2. You were a member of a listed government service or its reserve component, or were under a binding written commitment to become a member, on September 24, 1975.
3. You receive the disability payments for a combat-related injury. This is a personal injury or sickness that:
a. Results directly from armed conflict;
b. Takes place while you're engaged in extra-hazardous service;
c. Takes place under conditions simulating war, including training exercises such as maneuvers; or
d. Is caused by an instrumentality of war.
4. You would be entitled to receive disability compensation from the VA if you filed an application for it. Your exclusion under this
condition is equal to the amount you would be entitled to receive from the VA.

Pension based on years of service. If you receive a disability pension based on years of service, in most cases, you must include it in your income. However, if the pension qualifies for the exclusion for a service-connected disability (discussed earlier), don't include in income the part of your pension that you would have received if the pension had been based on a percentage of disability. You must include the rest of your pension in your income.

Based on the above do you or do you not qualify for the exclusion?

[JimEs]

BTW, thank you for taking the time to help me understand. 

I meet the #4 Condition for Exclusion. 

• I am entitled to receive disability compensation from the VA (I receive a VA disability)
• My amount would be all of my pension (because my retirement pay is less than the amount I receive from the VA)

And I meet this portion of what you put in italics “However, if the pension qualifies for the exclusion for a service-connected disability (discussed earlier), don't include in income the part of your pension that you would have received if the pension had been based on a percentage of disability. You must include the rest of your pension in your income.”

[DoninGA]

Did you receive a VA Determination letter after you retired?  If so, see this IRS website for information - https://www.irs.gov/individuals/military/special-tax-considerations-for-veterans

Under normal circumstances, the Form 1099-R issued to the veteran by Defense Finance and Accounting Services correctly reflects the taxable portion of compensation received. No amended returns would be required, since it has already been adjusted for any non-taxable awards.

If needed, veterans should seek assistance from a competent tax professional before filing amended returns based on a disability determination. Refund claims based on an incorrect interpretation of the tax law could subject the veteran to interest and/or penalty charges.

You should seek assistance from a local qualified tax professional in your area if you are going to amend your prior year tax returns.

[acashaw]

retirement depends on disability while serving.

how do I claim exemption on 1099r income?