More than 133,000 veterans may qualify for a refund of federal taxes they paid on disability severance pay dating back to 1991 ― taxes that shouldn’t have been collected in the first place.
Within the next month, Defense Department officials will send notification letters to veterans that they may be eligible for the refund, said Army Lt. Col. David Dulaney, executive director of the Armed Forces Tax Council.
Eligible veterans will have a year after they receive the notice to file a claim for the refund.
These refunds, which are the result of a law passed in 2016, apply to veterans who received this pay dating back to Jan. 17, 1991, with taxes withheld, and who also qualified for disability from the Veterans Affairs Department.
The 2016 Combat Injured Veterans Tax Fairness Act went into effect in 2017. The law requires DoD to identify the veterans whose benefits were previously improperly taxed; and the notification letter will include information about the amount of disability severance payments that were improperly taxed, and instructions for filing an amended tax return to receive the refund.
Of the 300,000 veterans who received the disability severance payment, DoD has identified 133,000 who may qualify for refunds, Dulaney said.
Under federal law, any service member who suffers a combat-related injury and is separated from the military receives a one-time, lump-sum disability severance payment based on their rank and years of service. Although the payout was supposed to be tax-free, DoD routinely took taxes out of the severance pay, according to advocacy groups. The 2016 law mandated that DoD stop improperly taxing the pay.
The notification letters will provide information to veterans on how they can apply for the refund. Defense officials have been working with Internal Revenue Service officials to clarify the process, Dulaney said.
The amount of tax refund will vary by veteran, as the amount of the disability severance varies based on rank and years of service. But it’s worth the time to file the claim, Dulaney said.