Do I have to pay taxes on military retirement if I was awarded VA disability compensation?

I received my first military retirement payment in February 2011 but was then awarded disability compensation from VA in October 2011, retroactive to January 2011.  I no longer receive payments from the military.  Everything through VA.  From what I understand, since it was retroactive to the first of the year, none of the money I received from my military retirement should be taxable...but I still received a 1099-R from DFAS for all the retirement money they sent me from February through October.  Do I still have to pay taxes on this money?  If not, how do I address this when completing my taxes?
    Thanks for your service.  Yes you need to pay taxes on the amount you received from DFAS.
    Anything you receive from the VA is tax free.  The service connected disability income you receive plus the additional amount for your spouse and children is not considered income and is non-taxable.  Do not include the VA payment in TurboTax.  You will not receive any form (1099-G) showing how much was paid.  You only get a letter from the VA each year showing how much to expect each month for the coming year.

    TurboTax asks about any non-taxable income including VA disability payments.  This is because if you use Schedule A you may deduct the higher of State Income Tax or Sales Tax.  If you didn't keep all your sales receipts, the IRS will allow a certain amount based on your income. The IRS allows VA benefits (including non-taxable benefits) in this table.  However for most people who live in a state that has State Income Tax you will get a larger deduction claiming the State Income tax paid rather than Sales Tax paid.   

    Your pension/military retirement pay is not considered a veteran benefit and is taxable income.  Enter it in TurboTax as an annuity.  Enter the information on the form 1099R into TurboTax.  See Publication 525 for more information or talk to the VA Service Center.
    I hope this helps.  Thanks for your service to our country!
    • I am in the same situation.  The problem is that it is as if the money received from DFAS doesn't exist now and it was all converted into money paid by the VA, as if they had been paying us all along.  So none of that income should count against us, and the question is how do we tell Turbo Tax that?  I've been told that since my husband retired in 2010 I could actually go back and amend that return to reflect that the income was not taxable, but there must be a way I can have our income for this year not be taxed without having to wait to do a return.
    • Check into CRSC through your branch Human Resource Command and apply for this. You may even be eligible for a TAX FREE Retirement check.

      If your disability rating was increased or you have been awarded 100% from the VA and awarded CRSC then YES you may claim your previous year filings for the time that your VA Claim was pending. I will include a link for you to read.

      Make sure you cite IRS Ruling 78-161. I would definitely go to a tax professional for this issue rather than filing online. You will not be able to efile this claim because of the paperwork and bring a copy of your DD 2-14, CRSC Award Letter, VA Rating Decision Letter (one with charts and dates in it) Strickland Decision Letter.
    There are two different programs that allow a Military Member who has retired due to Time In Service to receive a full VA Disability Check or a Tax Free pay. The programs can be viewed at the following link:

      It sounds like you need to get a corrected Statement o Annuity Paid 1099R from DFAS showing that no income but would include the amount of tax paid.  With this corrected document you then would change the amount entered in TurboTax.  If the money was from prior years, you will need to file an amended return.  
      It’s not TurboTax that you need to tell but the IRS.  The IRS also receives the 1099R from DFAS.  Until you get the corrected 1099R it doesn’t matter what you enter into TurboTax.  The IRS compares the amount entered on your return to the amounts reported on various W2 and 1099’s.
      • DFAS will not issue a correct 1099R.  In fact, mine for 2013 is wrong even after the VA disability kicked in, and is reflected on monthly statements.  When I inquired of them how to handle it, they said to include a copy of the letter granting the percentage disability from the VA and a copy of the Strickland Decision letter, which they provided to me, along with my tax return.  So, when the IRS gets my return, the computers will kick it out, and a person will have to see the included documents.  Way to go, government!  Not.
      • We ended up having our taxes done by H&R Block to make sure they were "done right". In the end, they had no idea what to do either and we ended up getting a letter from the IRS months after we filed saying we owed in the neighborhood of $5,000. I disputed this and ultimately had to do just as you said, mail the letters. The slate was then wiped clean. What a headache though! Thankfully, this year it was much easier since all our money came from VA the entire year.
      I understand the situation.  It doesn't appear that Turbotax can make the adjustment.  Pub 525 tells you you can, but not how.  After your taxes are filed, do a 1040X.  Be sure to explain in part II, and attach your award letters showing the withholding.  I went through it a couple years ago, and even with an appeal after an initial denial, everything was taken care of within 6 weeks.
      • If I have a 1099R from my military retirement for all year but just received an adjudicated VA disability on Dec 29, can I just subtract 12x the monthly VA disability amount from my military retirement 1099R and report that number in the taxable amount block of my military retirement 1099R?
      • I retired in Dec 2010 and have been receiving retirement and VA disability. I checked MyPay online and it did not have a W2 for me. It said that I was tax deferred due to my disability status. But I have gotten retirement diff from DFAS plus another sum of money monthly because my disability was combat related. I have no idea if I need to claim any of that.
      • You won't have a W-2 for your disability payments, but you will have a 1099-R for your retired pay.  You will need to pay taxes on the retired pay.
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