DoD Military Retirement Pay and VA's Concurrent Retirement and Disability Pay (CRDP), which is taxable?

In 2012, I retired from the military and receive retired pay based on years of service.  I also have a 90% disability rating from the VA and receive Concurrent Retirement and Disability Pay (CRDP).  The info on the irs, va and dfas websites are very confusing.  Is the CRDP taxable and will I receive a 1099 for the amounts I have received? The websites discuss retroactive pay and waiver of pay from my DOD retired pay. I've also read the IRS pub 525, not being a tax attorney ... I am totally confused.  Help!  I have the 1099-R from the DoD, will I receive one from the VA and do I report CRDP in my income.  The CRDP has had no tax withholding.  Thanks!
    There is a lot of conflicting and confusing information on this subject, and I think it is because of the way the VA offset is being phased out.  This is my understanding of it (we will be in your situation this year, and I have been trying to sift through the information for a while now).

    This is from DFAS: 

    Concurrent Retirement Disability Payments (CRDP):
    CRDP is a restoration of your retired pay, not a separate entitlement. Therefore,  if your retired pay is taxable so is any CRDP payments you receive. If your retired pay is non-taxable, your CRDP is also non-taxable.

    So, according to DFAS, the CRDP is only the offset amount (the reduction in your retired pay).  It is not the entire amount of your disability pay from the VA.  Because we are now in year 8 of a 9-year phaseout of the offset, that amount should be minimal. (I have seen places where the entire VA disability payment is referred to as CRDP, and that is incorrect, according to the DFAS definition.) 

    That would leave you with this:
    Military Retirement:  Taxable
    Offset (reduction of retirement):  Taxable
    VA Disability:  Non-taxable.

    (For retirees with non-taxable Military Retirement, the offset is non-taxable as well.)

    The issue is that the taxable offset is not included in the 1099-R totals, and the VA does not issue a 1099 for disability pay.   It is my understanding that the CRDP is taxable, but no one takes on the responsibility for reporting it as such to the IRS or to the recipient.

    Does that clarify anything?  Or muddle it more? 
    • So since this is not a retirement that I have paid into how do I enter it on the taxes?  This is a retirement that is paid out to me but there doesn't seem to be a place for that, I'm thinking I'm getting penalized for early withdrawal.
    • The taxable retirement portion should have been reported to you on a 1099-R.  The 1099-R should have a code 7 in Box 7 indicating that it is a normal distribution.  That prevents it from being taxed as an early distribution.

      To enter the 1099-R, click on Federal Taxes (on the sidebar or at the top) and then Wages and Income.  When the page opens, click on "Explore on my own" just under the Easy Guide button.  On the next page, scroll down to the Retirement Plans and Social Security section and select "IRA, 401(k), Pension Plan Withdrawals (1099-R)".
    • and then what? I have non taxable va disability and need to dedcut on line 16b but cant seem to determine how to do it in turbotax?
    • The non-taxable disability should not be included on your 1099-R.  The VA doesn't send tax forms for disability.
    • In accordance with IRS Pub 525 reference military retirement pay - disability compensation is not taxable. If that's true, why isn't this fact evident on the 1099R?
    • The 1099-R should show only the retirement portion, not the disability pay.  The disability comes from the VA and isn't included on the 1099-R, which comes from DFAS.  If you believe yours is incorrect, you need to resolve it with DFAS.
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