By Monique Valentine, CPA
Monique T. Valentine CPA
As most of you know, many military retirees receive disability benefits from the Veterans Administration and receive these benefits tax-free. These benefits are in addition to the regular retirement benefits that the retiree receives from Defense Finance and Accounting Services (DFAS).
Military retirees with service-related injuries or sickness will typically apply for service-connected disability benefits from the Department of Veterans Affairs (VA) or even apply for an increase in disability benefits after an award has been granted. Once the VA receives the application for initial benefits or increased benefits, it will review the application and issue a disability rating to the retiree based on the extent of the injuries or disabilities sustained, which can take months to receive. Once a determination is made by the VA, the retiree must sign a waiver, pursuant to section 1005 of the Veterans’ Benefit Act of 1957, 38 U.S.C. 3105, agreeing to have the taxpayer’s future retirement pay reduced in an amount equal to the disability benefits to be received from the VA.
In the meantime, during the time the application is being reviewed by the VA and before a disability rating is awarded, the retiree is continuing to receive their full monthly retirement benefits from DFAS. Once a retroactive award is made by the VA, per Revenue Ruling 78-161, based on the Strickland decision, military retirees may reduce their taxable retired pay from DFAS by the amount of the retroactive VA award for that year.
Once the waiver has been signed by the retiree, future disability benefits will be paid to directly from the VA and the retired pay received from DFAS is reduced accordingly. Therefore, no future adjustments are necessary to the amounts received from DFAS.
Recently, there has been some misinformation circulating in the military retiree community regarding the further reduction of military retirement benefits from DFAS based on an assigned VA disability rating. The documentation that is circulating indicates that retirees can further reduce their retirement benefits from DFAS to the full extent of their disability rating from VA, based on a memorandum issued by the Chief, Branch 2, Employee Benefits and Exempt Organizations Unit on March 31, 1999. The information that is circulating indicates that if the retiree received a disability rating, then they can file amended returns to claim additional reductions in their taxable retired pay from DFAS based on a re-computed net disability exclusion until they reach age 65.
Please be aware that this is not a correct interpretation of the Chief Counsel Memorandum. We have spoken with the Chief Counsel’s office and have confirmed that these claims of additional reductions in DFAS retired pay are not an accurate interpretation of the Memorandum and that the reduction in DFAS retired pay is only allowed when an initial VA award has been received or an amended award has been approved for which a retiree did not receive the benefits from the VA.
