Don't know if this has been posted, but I always see the question asked so I'll post it up anyways.
1.Purpose. To inform disabled Soldiers, separated withseverance pay, of possible tax refunds.
2. Under the currentdepartment of Defense Finance and Accounting Service (DFAS) and the InternalRevenue Service (IRS) interpretations of federal law, there are tax advantagesyou should know about. If yourdisability falls under one of four categories you are eligible for thesebenefits. The first three are based onadministrative determinations referred to as 10 a, b, or c, on DA Form 199, andare made by the Physical Evaluation Board (PEB). The fourth is a disability determination madeby Veterans Affairs (VA). You should askyour Physical Evaluation Board Liaison Officer (PEBLO) if your disability wasdesignated as either 10 a, b, or c in the PEB proceedings. If such a designation was granted DFAS shouldnot take any Federal Taxes out of your disability severance pay. If you have the tax taken out when awardedeither a 10 a, b, or c designation DFAS has instructed that the field financeoffice is to contact DFAS at [email protected]to ensure automatic prompt refund of the withheld taxes.
3. a. If your PEBLO tells you that the PEB found youineligible for a 10 a, b, or c designation, your severance pay will be taxedINITIALLY. However, you may stillqualify for a tax break if you are awarded a VA disability rating for the samecondition that resulted in your medical discharge. For example, if you are found unfit by thePEB for a right knee injury, and, subsequently, the VA also rates that sameright knee, you can apply for a refund of the taxes withheld. To secure your refund, upon receipt of yourVA rating, follow the directions below.
b. DFAS can refundall of your severance pay taxes. However, as of the date of this paper, the IRS has not officially endorsed the DFAS position that you are eligible for afull refund. Specifically, the IRS hasnot officially stated how much of a refund you are eligible to receive. Consequently, in the future the IRS could claim that you underpaid your taxes for the tax year in which you received yourrefund from DFAS.
(1) To secure the refund you must send copies of your separation orders, DD Form 214, VA award documentation, and the attachedsample cover letter #1 to DFAS by fax 317-275-0248/ ATTN: Separations Branch or scan and email [email protected].
[UPDATE- SEE POSTS BELOW, THIS EMAIL IS OBSOLETE/NOT VALID]
(2) If you follow the above guidelines, but arenot provided a refund within two (2) months of your request, contact theSeparation and Reenlistment Division at DSN 699-5950/2829 or commercial 317-212-2829or 317-212-5950. [email protected].
(3) The request, with all necessary documentation,must be received at DFAS by 31 December of the year in which you received your separation paycheck. If your requestdoes not meet this deadline, DFAS cannot provide you with any refund. DFAS has indicated they will not provide youa corrected W-2 if you do not meet the same calendar year deadline.
(4) Ifyou are not eligible to request a refund from DFAS because of the timelimitations, and you have not filed your tax return for that tax year, you mayfile a tax return and include a copy of the VA Award to inform the IRS that theseverance pay should not be considered taxable. You should file your Federal Return with “ST CLAIR vs. THE UNITEDSTATES” written across the top of the tax form. If you have already filed your tax return for that tax year you willhave to ask the IRS for a refund. Be aware that, as of the date of this paper, the IRS does not have an official position on what portion of your severance pay is tax-free. Consequently,you may not get a full refund. Moreover,in the future the IRS could claim that you underpaid your taxes for the tax year in which you received your refund. In an attempt to secure a refund from IRS, you must mail to the IRS copies of yourFederal Individual Tax Return (or amended return 1040X, if appropriate – with the ST CLAIR vs. THE UNITED STATES written on the top) for the year in whichyou received your severance pay, original IRS Form W-2, VA disability award documentation, DD Form 214, separation orders, and the enclosed sample coverletter #2. Address your request and sample cover letter to your servicing IRS location. This last IRS request is not always known by all IRS employees and sometimes there can be less then complete success in every filing.
Enclosures
2 Sample letters
Prepared by:
Dennis Brower
Agency Legal Advisor
USAPDA
202-782-3002 (DSN 662)
SAMPLE COVER LETTER #1
DEFENSE FINANCE AND ACCOUNTING SERVICE __/__/__
INDIANAPOLIS CENTER
ATTN: DFAS-PJEC/IN
8899 EAST 56TH STREET
INDIANAPOLIS,IN 46249-0801
Dear Sir/Ma’am:
I was medically discharged from the U.S. Army/ARNG, on . I was awarded severance pay in the amount of dollars. My disability severance pay was taxed. This money was withheld for payment to the IRS.
I have now received a disability rating from the Veterans Affairs (VA) for the samedisability for which the Army compensated me, and in the same calendar year that I received my severance pay. Therefore, under the provisions of 26 U.S.C. § 104(b)(2), I am eligible for DFAS refund of the taxes withheld.
Enclosed are copies of the following documents to support my request:
· VA award documentation
· Separation orders
· DD Form 214 (or 215)
Please contact meif you require additional information. My current phone # is (___) ___-____. My current address is
Military pay account # (SSAN)_______________________________________________.
My Current banking information is:
Financial Organization: ____________________________________________________.
Routing Number:_________________________________________________________.
Account Number: _________________________________________________________.
Checking ( ) or Savings ( ).
Your prompt attention to this request is appreciated.
SAMPLE COVER LETTER #2
INTERNAL REVENUE SERVICE CENTER __/__/__
Dear Sir/Ma’am:
I was medically discharged from the U.S. Army/ARNG, on . I was awarded severance pay in the amount of dollars. My disability severance pay was taxed. This money was withheld and paid to the IRS in tax year ____.
I have now receiveda disability rating from the Veterans Affairs (VA) for the same disability forwhich the Army compensated me.
Under theprovisions of 26 U.S.C. § 104(a)(4), and 26 U.S.C. § 104(b)(2) (D), asinterpreted by the District Court in St. Clair v. United States,disability severance payments are amounts received for personal injury(ies) andare thus excludable from taxable income. The only caveats are (1) a VA rating for the injury for which severancepay was granted and (2) a waiver of an equivalent amount of VA disability pay(See IRS “Action on Decision”, #cc-1992-006, distributed 19 Dec 1991).
As indicated, I am in receipt of a VA rating for the injury for which I was granted severance pay,and I have waived a like amount of my VA disability pay. Therefore, I request a refund of taxes withheld in year ____, the year in which I received my severance pay.
Enclosed are copies of the following documents to support my request.
· Individual Federal Tax Return for the year _____(the year in which I received my severance pay)
· Original IRS Form W-2
· Corrected IRS Form W-2
· VA award documentation
· Separation orders
· DD Form 214
Please contact meif you require additional information. My current phone # is (___) ___-____. My current address is
Your promptattention to this request is appreciated.
Sincerely,
INFORMATION PAPER
5 Jan 11
SUBJECT: Disability SeverancePay Tax Refund/Issues
1.Purpose. To inform disabled Soldiers, separated withseverance pay, of possible tax refunds.
2. Under the currentdepartment of Defense Finance and Accounting Service (DFAS) and the InternalRevenue Service (IRS) interpretations of federal law, there are tax advantagesyou should know about. If yourdisability falls under one of four categories you are eligible for thesebenefits. The first three are based onadministrative determinations referred to as 10 a, b, or c, on DA Form 199, andare made by the Physical Evaluation Board (PEB). The fourth is a disability determination madeby Veterans Affairs (VA). You should askyour Physical Evaluation Board Liaison Officer (PEBLO) if your disability wasdesignated as either 10 a, b, or c in the PEB proceedings. If such a designation was granted DFAS shouldnot take any Federal Taxes out of your disability severance pay. If you have the tax taken out when awardedeither a 10 a, b, or c designation DFAS has instructed that the field financeoffice is to contact DFAS at [email protected]to ensure automatic prompt refund of the withheld taxes.
3. a. If your PEBLO tells you that the PEB found youineligible for a 10 a, b, or c designation, your severance pay will be taxedINITIALLY. However, you may stillqualify for a tax break if you are awarded a VA disability rating for the samecondition that resulted in your medical discharge. For example, if you are found unfit by thePEB for a right knee injury, and, subsequently, the VA also rates that sameright knee, you can apply for a refund of the taxes withheld. To secure your refund, upon receipt of yourVA rating, follow the directions below.
b. DFAS can refundall of your severance pay taxes. However, as of the date of this paper, the IRS has not officially endorsed the DFAS position that you are eligible for afull refund. Specifically, the IRS hasnot officially stated how much of a refund you are eligible to receive. Consequently, in the future the IRS could claim that you underpaid your taxes for the tax year in which you received yourrefund from DFAS.
(1) To secure the refund you must send copies of your separation orders, DD Form 214, VA award documentation, and the attachedsample cover letter #1 to DFAS by fax 317-275-0248/ ATTN: Separations Branch or scan and email [email protected].
[UPDATE- SEE POSTS BELOW, THIS EMAIL IS OBSOLETE/NOT VALID]
(2) If you follow the above guidelines, but arenot provided a refund within two (2) months of your request, contact theSeparation and Reenlistment Division at DSN 699-5950/2829 or commercial 317-212-2829or 317-212-5950. [email protected].
(3) The request, with all necessary documentation,must be received at DFAS by 31 December of the year in which you received your separation paycheck. If your requestdoes not meet this deadline, DFAS cannot provide you with any refund. DFAS has indicated they will not provide youa corrected W-2 if you do not meet the same calendar year deadline.
(4) Ifyou are not eligible to request a refund from DFAS because of the timelimitations, and you have not filed your tax return for that tax year, you mayfile a tax return and include a copy of the VA Award to inform the IRS that theseverance pay should not be considered taxable. You should file your Federal Return with “ST CLAIR vs. THE UNITEDSTATES” written across the top of the tax form. If you have already filed your tax return for that tax year you willhave to ask the IRS for a refund. Be aware that, as of the date of this paper, the IRS does not have an official position on what portion of your severance pay is tax-free. Consequently,you may not get a full refund. Moreover,in the future the IRS could claim that you underpaid your taxes for the tax year in which you received your refund. In an attempt to secure a refund from IRS, you must mail to the IRS copies of yourFederal Individual Tax Return (or amended return 1040X, if appropriate – with the ST CLAIR vs. THE UNITED STATES written on the top) for the year in whichyou received your severance pay, original IRS Form W-2, VA disability award documentation, DD Form 214, separation orders, and the enclosed sample coverletter #2. Address your request and sample cover letter to your servicing IRS location. This last IRS request is not always known by all IRS employees and sometimes there can be less then complete success in every filing.
Enclosures
2 Sample letters
Prepared by:
Dennis Brower
Agency Legal Advisor
USAPDA
202-782-3002 (DSN 662)
SAMPLE COVER LETTER #1
DEFENSE FINANCE AND ACCOUNTING SERVICE __/__/__
INDIANAPOLIS CENTER
ATTN: DFAS-PJEC/IN
8899 EAST 56TH STREET
INDIANAPOLIS,IN 46249-0801
Dear Sir/Ma’am:
I was medically discharged from the U.S. Army/ARNG, on . I was awarded severance pay in the amount of dollars. My disability severance pay was taxed. This money was withheld for payment to the IRS.
I have now received a disability rating from the Veterans Affairs (VA) for the samedisability for which the Army compensated me, and in the same calendar year that I received my severance pay. Therefore, under the provisions of 26 U.S.C. § 104(b)(2), I am eligible for DFAS refund of the taxes withheld.
Enclosed are copies of the following documents to support my request:
· VA award documentation
· Separation orders
· DD Form 214 (or 215)
Please contact meif you require additional information. My current phone # is (___) ___-____. My current address is
Military pay account # (SSAN)_______________________________________________.
My Current banking information is:
Financial Organization: ____________________________________________________.
Routing Number:_________________________________________________________.
Account Number: _________________________________________________________.
Checking ( ) or Savings ( ).
Your prompt attention to this request is appreciated.
SAMPLE COVER LETTER #2
INTERNAL REVENUE SERVICE CENTER __/__/__
Dear Sir/Ma’am:
I was medically discharged from the U.S. Army/ARNG, on . I was awarded severance pay in the amount of dollars. My disability severance pay was taxed. This money was withheld and paid to the IRS in tax year ____.
I have now receiveda disability rating from the Veterans Affairs (VA) for the same disability forwhich the Army compensated me.
Under theprovisions of 26 U.S.C. § 104(a)(4), and 26 U.S.C. § 104(b)(2) (D), asinterpreted by the District Court in St. Clair v. United States,disability severance payments are amounts received for personal injury(ies) andare thus excludable from taxable income. The only caveats are (1) a VA rating for the injury for which severancepay was granted and (2) a waiver of an equivalent amount of VA disability pay(See IRS “Action on Decision”, #cc-1992-006, distributed 19 Dec 1991).
As indicated, I am in receipt of a VA rating for the injury for which I was granted severance pay,and I have waived a like amount of my VA disability pay. Therefore, I request a refund of taxes withheld in year ____, the year in which I received my severance pay.
Enclosed are copies of the following documents to support my request.
· Individual Federal Tax Return for the year _____(the year in which I received my severance pay)
· Original IRS Form W-2
· Corrected IRS Form W-2
· VA award documentation
· Separation orders
· DD Form 214
Please contact meif you require additional information. My current phone # is (___) ___-____. My current address is
Your promptattention to this request is appreciated.
Sincerely,