VA Retroactive Pay

[eugene1459]

I am ready to file my 2025 taxes and know that my DFAS 1099-R income does not include the VA retroactive  reduction of income due to an increased disability percentage. I know the amount withheld, but don't know how to report the reduction in my 1099-R income without filing and doing a 1040X after my return is submitted. I want to reduce my income by the VA amount, but can't figure out the right way to do it on the return I'm getting ready to finish and file?

[MaryK4]

To report your VA retroactive reduction without waiting to file an amendment, you should use the adjustment method within the 1099-R entry screens. This allows you to report the 1099-R exactly as issued while simultaneously excluding the non-taxable VA portion.

The Step-by-Step Fix in TurboTax

1. Enter the 1099-R exactly as it appears in Federal > Wages & Income > Retirement Plans and Social Security.
2. Click through the follow-up questions until you see a screen titled "Was this a payout from a qualified plan?" or "What did you do with the money?"
3. Look for "Was any part of this distribution non-taxable because it was a retroactive VA disability award?", select Yes and enter the specific amount of the reduction.

Since you are reporting an amount that differs from what the IRS received from DFAS,  keep a copy of your VA Award Letter showing the retroactive effective date and the Audit/Adjustment sheet from DFAS showing the "Combat-Related Special Compensation" or "VA Waiver" calculation.
 

[eugene1459]

I followed your instructions: There was no question under "Qualified" plan "Was any part of this distribution non-taxable because it was a retroactive VA disability award?". Dead end, so far? Help?

[MaryK4]

Alternatively, you can enter the 1099-R exactly as issued by DFAS. To cancel out the non-taxable portion, go to the "Other Income" section and enter the VA award amount as a negative number. 

Under Less Common Income, select Miscellaneous Income, 1099-A, 1099-C 

1. On the Let's Work on Any Miscellaneous Income page, select Start to the right of Other reportable income.
2. On the Any Other Taxable Income? screen, select Yes.
3. On the Other Taxable Income screen enter the description Retroactive VA Disability Award per IRS Rev. Rul. 78-161 and amount (as a negative).  Select Continue.
4. On the Other Miscellaneous Income Summary screen, select Done.

@eugene1459

[eugene1459]

Thank you MaryK4: I ended up finding how to use the correct taxable amount in for 1099-R, box 2a, and TurboTax was excellent at navigating me to a Form 4852. I attached the VA letters of withholding and on Lines 9 & 10 of the Form 4852, was able to detail exactly why the 1099-R, box 2a, amount should be adjusted. All the correct calculations flowed properly and my reduction in income was recorded properly. I thought it best to mail in my return because I still owed. Your other suggestion about using a negative value in "Other Income" to offset the 1099-R, box 2a, amount, is a good idea, however, I thought the cleanest way and more explanatory was to go with option one using the Form 4852. Besides, I had already completed my return using the first method. Your information to me was very helpful and gave me confidence that I didn't have to file, pay, and then refile an amended 1099X return. This should work out and I would definitely be able to survive any questions about the way in which this was finally done.