The Defense Department has begun notifying more than 130,000 veterans they may be eligible for a refund for taxes wrongly paid on their disability severance payment, a DoD tax expert said.
Army Lt. Col. David Dulaney, the executive director for the Armed Forces Tax Council, said the department began mailing notices to veterans July 9.
Taxes Improperly Withheld
Under federal law, veterans who suffer combat-related injuries and who are separated from the military are not supposed to be taxed on the one-time lump sum disability severance payment they got from the military.
For years, the DoD improperly withheld taxes on these payments from thousands of unsuspecting veterans, who were typically unaware that their benefits were being improperly reduced.
In 2016 Congress passed the Combat-Injured Veterans Tax Fairness Act which directed DoD to identify veterans who have been separated from service for combat-related injuries and had taxes improperly withheld from their severance payments.
The law also required DoD to determine how much these veterans are owed so they can recover the withheld amounts, notify them of their eligibility for a refund, and tell them how to get that refund from the IRS.
Veterans Now Being Notified
Originally, veterans were supposed to be notified in February, but holdups at DOD delayed the notifications until just recently.
The deadline to file for the refund is one year from the date of notification from the DOD notice, or three years after the due date for filing the original return for the year the disability severance payment was made, or two years after the tax was paid for the year the disability severance payment was made, according to the IRS.
How To File For A Refund
Affected veterans can submit a claim based on their actual disability severance payment by submitting an IRS Form 1040X, the Amended U.S. Individual Income Tax Return.
The IRS also has approved a simplified method for obtaining the refund, in which veterans can claim the standard refund amount on Form 1040X based on when they received the disability severance payment. Those standard refund amounts are $1,750 for tax years 1991 to 2005, $2,400 for tax years 2006 to 2010, and $3,200 for tax years 2011 to 2016.
Estates or surviving spouses can file a claim on behalf of a veteran who is now deceased.
You may still be eligible for a refund even if you don't get a letter from the DOD. Visit the IRS website and search “combat injured veterans” for further information.