The Strickland Decision and IRS Ruling 78-161 allow adjustments to taxable income when retroactive VA disability compensation affects previously taxed military retirement pay. Since DFAS won't reissue your 1099-R, here's how you can address this:
- Amend Your 2023 Tax Return: File an amended return (Form 1040-X) for the 2023 tax year. Include the VA determination letter that specifies the retroactive disability compensation amount and effective date. This letter is crucial for substantiating the adjustment.
- Adjust Taxable Income: On the amended return, reduce the taxable portion of your military retirement pay by the amount of retroactive VA disability compensation. This adjustment ensures that the income taxed previously is corrected.
- Special Statute of Limitations: Normally, claims for refunds must be filed within three years of the original return. However, for retroactive VA disability determinations, the statute of limitations is extended by one year from the date of the VA determination letter.