The Combat-Injured Veterans Tax Fairness Act of 2016 has brought good news for veterans as they can now claim tax refund on the money that they paid as disability severance payments way back in 1991. Initially, the Department of Defense (DoD) routinely taxed the disability severance payments, however, the Combat-Injured Veterans Tax Fairness Act now mandates the DoD to track the disability severance payments of veterans that were paid by them as taxable income under Form W-2, Wage, and Tax Statement, after January 17 and to return that amount by issuing notification letters to all veterans eligible for tax refund.

This loophole in tax withholding was discovered by the National Veterans Legal Services Program.  

Nearly 1,33,000 veterans are eligible for claiming tax refund on the money that was improperly withheld from their severance payments on the grounds of combat-related injuries or any other disability compensation. Working in close collaboration with the IRS, the DoD has created these notification letters where it provides a detailed information as to how the veterans should claim the money they are entitled to.

How To Claim Your Tax Refund?

Now, the IRS offers two ways in which veterans can apply for tax refund – they can either file for return under Form 1040X, (Amended U.S. Individual Income Tax Return) for the year in which they received the lump-sum amount of disability severance pay or they can opt to claim a standard refund on the Form 1040X itself. The second option is convenient for those who cannot determine the actual payment amount for the year they received the payment.

Usually, taxpayers are allowed to claim their refunds within three years of the due date of the return, however, this law has been mended for the veterans giving them the flexibility of claiming their refunds within one year of the date of receiving the DoD letter.

Instructions

All the veterans who are eligible for claiming tax refund should fill out Form 1040X with special care. All forms need to be filed on paper and on the front page of the form, one has to write either “St. Clair Claim” or “Veteran Disability Severance” and after filing all the necessary details, mail the form to the IRS.  Also, along with the form, it is necessary to attach a copy of the DoD letter.

If one chooses the standard refund option while claiming the refund, he/she has to write “Disability Severance Payment” on line 15 of Form 1040X and mention the standard refund amount on both line 15 and line 22 corresponding to the tax year slabs given below:

• $1,750 for tax years 1991 – 2005
• $2,400 for tax years 2006 – 2010
• $3,200 for tax years 2011 – 2016

What If You Haven’t Received A Letter From The DoD?

Veterans who did not receive any letter from the DoD can still apply for tax refunds under Form 1040X, but they must include:

• A DD Form 214  [Certificate of Release or Discharge from Active Duty] or a copy of any other relevant documentation that displays both the reason for and the exact amount of the disability severance payment (example, a letter from the Defense Finance and Accounting Services).

• A copy of the VA (Veteran Affairs) determination letter that confirms the veteran’s disability or states that the veteran incurred an injury or sickness as a direct result of armed conflict by engaging in extra-hazardous service, or during simulated war exercise sessions, or due to an instrumentality of war.

In case any veteran neither has a DoD letter or the two documentations mentioned above, they must get the required proof by contacting DFAS, or the Department of Veterans Affairs, or the National Personnel Records Center.

For any further information on this, you can visit this page on the IRS website or you can contact MyTaxFiler at [email protected] and our tax experts will fill you in with all the details about the same!