Disability Severance Pay?

[RedCurrahee]

I just wanted to start a new thread on disability severance pay and how it works as it seems many people on here have questions about it, including me, but aren’t getting solid answers. Please provide any input you have on this topic to help others out. What I know about it is you should receive it somewhere around 20 business days after your separation date. If you were rated at 0% for your referred condition they won’t recoup any of the severance pay and I believe I’ve heard of your rates 100% by the VA they won’t recoup any of it either, correct me if I’m wrong. You also won’t be taxed on it if your referred condition is combat related or if you are receiving any monthly compensation from the VA. It is otherwise taxed at 22% Federal tax. If your severance pay is taxed you can receive a refund from DFAS by submitting a claim online at https://www.DFAS.mail/debt and claims/submit claim.html

To submit a refund claim you will need your DD214 (member copy 4), The entire VA Award letter for your disabilities, Separation orders to include amended orders, PEB proceedings form from your branch of service i.e. DA 199 form for Army
You must submit the claim with all documents before December 15th of the year in which the disability severance pay was paid. If you received your severance pay in prior tax years you need to contact the IRS to get things squared away at 1-800-829-1040.

Now some questions I have are:
1. Will I be placed in a higher tax bracket due to the large severance pay lump sum and have to pay additional taxes during tax season? I thought I heard somewhere you can submit something to not be placed in a higher tax bracket as it’s for disability, let me know if you know anything on this.

2. If they recoup the severance pay how much do they take per month? From what I’ve heard they only recoup what your DoD rating is so if you’re 90% VA and 10% DoD they only take whatever the 10% monthly payout is. For example if you’re receiving $2,300 a month for a VA rating of 90% they will only recoup like $150 a month for the 10% DoD rating until they have recouped the full severance pay amount after taxes. Comment if this is wrong or there’s more to it.

I hope we can get a good thread going with some good info to help people out wondering about how severance pay works.

 

[RonG]

Hello @RedCurrahee

Good idea for a thread.

The following regarding recoupment has been posted multiple times:

Recoupment of Disability Severance Pay:
Here is some information from the VA regarding recoupment.
M21-1, Part III, Subpart v, Chapter 4, Section B - Recoupment of Separation Benefits

III.v.4.B.3.b. General Policies Regarding Withholdings to Recoup Disability Severance Pay

Generally, if a Veteran received disability severance pay, VA must withhold from his/her monthly compensation an amount equal to the monthly compensation payable for the disability(ies) for which the Veteran received disability severance pay. VA continues to withhold this amount until it has recouped the amount specified in M21-1, Part III, Subpart v, 4.B.2.d. Important: The monthly withholding may never exceed the monthly amount of compensation payable based on the initial, compensable rating, as defined in M21-1, Part III, Subpart v, 4.B.3.c, that VA assigns the severance-pay disability(ies). If a Veteran has multiple, severance-pay disabilities, each rated 0-percent disabling, and VA assigns a 10-percent disability rating to them under 38 CFR 3.324, no withholding is necessary for these disabilities until VA assigns a compensable rating to one or more of them, individually. Withhold the additional benefits payable because of application of the bilateral factor if the initial, compensable rating included application of the bilateral factor, and entitlement to the bilateral factor was based exclusively on severance-pay disabilities.

IRS INFORMATION ON TAXES ON DISABILITY SEVERANCE PAY—MILITARY

Combat-Injured Veterans Tax Fairness Act of 2016​

The Combat-Injured Veterans Tax Fairness Act of 2016, went into effect in 2017. Under this federal law, Veterans who suffer combat-related injuries and are separated from the military are not to be taxed on the one-time lump sum disability severance payment they receive from the Department of Defense. This law instructs DoD to identify Veterans who were taxed in order for them to file an amended return to receive their refund. Go to LINK —->Combat-Injured Veterans Tax Fairness Act Claim Information for more details.

DFAS Information for those who were taxed on their combat related disability severance pay
Disability Severance Pay <—-LINK


Ron

 

[RedCurrahee]

Thanks for your input RonG!

 

[chaplaincharlie]

Taxable income might push part or all of your severance into a different tax bracket.

 

[RonG]

Taxable income might push part or all of your severance into a different tax bracket.

Hi,

Yes, I paid taxes at a higher rate for the years I received reenlistment bonuses.

The disability severance pay is non-taxable for combat related injuries.. The Combat-Injured Veterans Tax Fairness Act of 2016, went into effect in 2017. Under this federal law, Veterans who suffer combat-related injuries and are separated from the military are not to be taxed on the one-time lump sum disability severance payment they receive from the Department of Defense. This law instructs DoD to identify Veterans who were taxed in order for them to file an amended return to receive their refund. Go to LINK —->Combat-Injured Veterans Tax Fairness Act Claim Information for more details.

There was a period of time that DFAS was taxing the combat-related severance pay . Later, there were provisions for refunds in certain cases.
DFAS Information for those who were taxed on their disability severance pay
Disability Severance Pay <—-LINK

Ron

 

[chaplaincharlie]

Thanks RonG for clarifying that some severance might be tax free.

 

[robins]

I just wanted to start a new thread on disability severance pay and how it works as it seems many people on here have questions about it, including me, but aren’t getting solid answers. Please provide any input you have on this topic to help others out. What I know about it is you should receive it somewhere around 20 business days after your separation date. If you were rated at 0% for your referred condition they won’t recoup any of the severance pay and I believe I’ve heard of your rates 100% by the VA they won’t recoup any of it either, correct me if I’m wrong. You also won’t be taxed on it if your referred condition is combat related or if you are receiving any monthly compensation from the VA. It is otherwise taxed at 22% Federal tax. If your severance pay is taxed you can receive a refund from DFAS by submitting a claim online at https://www.DFAS.mail/debt and claims/submit claim.html

To submit a refund claim you will need your DD214 (member copy 4), The entire VA Award letter for your disabilities, Separation orders to include amended orders, PEB proceedings form from your branch of service i.e. DA 199 form for Army
You must submit the claim with all documents before December 15th of the year in which the disability severance pay was paid. If you received your severance pay in prior tax years you need to contact the IRS to get things squared away at 1-800-829-1040.

Now some questions I have are:
1. Will I be placed in a higher tax bracket due to the large severance pay lump sum and have to pay additional taxes during tax season? I thought I heard somewhere you can submit something to not be placed in a higher tax bracket as it’s for disability, let me know if you know anything on this.

2. If they recoup the severance pay how much do they take per month? From what I’ve heard they only recoup what your DoD rating is so if you’re 90% VA and 10% DoD they only take whatever the 10% monthly payout is. For example if you’re receiving $2,300 a month for a VA rating of 90% they will only recoup like $150 a month for the 10% DoD rating until they have recouped the full severance pay amount after taxes. Comment if this is wrong or there’s more to it.

I hope we can get a good thread going with some good info to help people out wondering about how severance pay works.

I don't have a specific reference but just want to clarify my understanding of how the recoup works. You're severance is not recouped if you're VA rating does NOT change when you remove the rating assigned to unfitting conditions. When you're DOD rating is 0%, you're severance isn't recouped because when you remove that 0% from the VA rating the VA rating doesn't change. The other example is if you're DOD rating is 20% and VA rating is 90% and if you remove the 20% and you're DOD rating is still 90%, they won't recoup. The reason this matter is because if that rating changes, it can impact the recoup.

I'll actually give an example in my case. My DOD percentage was 20% (condition A) and VA rating was 80% (conditions A-H). With the 20% for condition A removed, my VA rating was still 80% for conditions B-H so there was no recoup. I was arguing that the 20% was incorrect and should have been 60% because some of the other conditions were actually secondary to the primary condition. The VA changed the rating for condition A to 60% and my VA rating went up to 90%. At that point, with condition A removed (60%), the total VA rating decreased below 90% so they started to recoup at that time. They base the recoup off how much you're VA rating changes with the DOD unfitting conditions removed (thus why there is not recoup is the VA rating doesn't change).


Also, you can get the severance tax back if the VA gives you a rating for the same DOD unfitting condition, not just if it's combat related. There are 2 times severance isn't taxed: 1. combat related and 2. VA has assigned a rating for the corresponding unfitting condition. There are some additional benefits like CRSC (which I don't understand) if a condition is combat related but the severance shouldn't be taxed if you have a corresponding VA rating for unfitting conditions as well. It doesn't matter whether they are combat related. If you aren't able to get the tax back prior to separation or if it's close to end of year, you can file to receive it when you file your taxes for that year. Here is a link: Disability Severance Pay

 

[RonG]

Recoupment: VA M21-1, describes recoupment for disability severance pay by the VA.

Reference: M21-1, Part III, Subpart v, Chapter 4, Section B - Recoupment of Separation Benefits
LINK <----

CRSC: Combat Related Special Compensation (CRSC) replaces some or all of waived retired pay, nothing else.
Collection of CRSC information LINK <—-

Ron

 

[RedCurrahee]

Do any of you know if the severance pay placed you in a higher tax bracket with the IRS? Just wondering if I need to plan to be charged extra taxes as I will be receiving severance pay sometime in December this year. If that’s the case it’s kind of messed up for the government to pay you for a disability and then take a bunch of it back. All veteran’s disability no matter if it’s combat related or not should honestly be tax free.

 

[RonG]

Do any of you know if the severance pay placed you in a higher tax bracket with the IRS? Just wondering if I need to plan to be charged extra taxes as I will be receiving severance pay sometime in December this year. If that’s the case it’s kind of messed up for the government to pay you for a disability and then take a bunch of it back. All veteran’s disability no matter if it’s combat related or not should honestly be tax free.

Here are the tax brackets for tax year 2023 (for filing in 2024)

Tax brackets for single individuals:​

The IRS is increasing the tax brackets by about 7% for both individual and married filers across the different income spectrums. The top tax rate remains 37% in 2023.

• 10%: Taxable income up to $11,000 or less
• 12%: Taxable income over $11,000
• 22%: Taxable income over $44,725
• 24%: Taxable income over $95,375
• 32%: Taxable income over $182,100
• 35%: Taxable income over $231,250
• 37%: Taxable income over $578,125

Tax brackets for joint filers: ​

• 10%: Taxable income up to $22,000
• 12%: Taxable income over $22,000
• 22%: Taxable income $89,450
• 24%: Taxable income $190,750
• 32%: Taxable income $364,200
• 35%: Taxable income $462,500
• 37%: Taxable income over $693,750

It was my observation that many recipients of lump sum payments while I was on active duty (‘66-‘91) received a nice refund after filing their tax return due to the amount deducted from the lump sum was at a rate much higher than the recipient’s actual effective rate.

Recommend visiting the IRS web pages for additional info concerning taxes OR see your chosen tax professional. I do not recommend the tax filing shops often found in strip malls each year.

Ron

=============

Edited to add:

TAX BRACKETS FOR 2022 (for filing in 2023):


The tax items for tax year 2022 of greatest interest to most taxpayers include the following dollar amounts:

• The standard deduction for married couples filing jointly for tax year 2022 rises to $25,900 up $800 from the prior year. For single taxpayers and married individuals filing separately, the standard deduction rises to $12,950 for 2022, up $400, and for heads of households, the standard deduction will be $19,400 for tax year 2022, up $600.
• The personal exemption for tax year 2022 remains at 0, as it was for 2021, this elimination of the personal exemption was a provision in the Tax Cuts and Jobs Act.
• Marginal Rates:For tax year 2022, the top tax rate remains 37% for individual single taxpayers with incomes greater than $539,900 ($647,850 for married couples filing jointly).
  The other rates are:
  35%, for incomes over $215,950 ($431,900 for married couples filing jointly);
  32% for incomes over $170,050 ($340,100 for married couples filing jointly);
  24% for incomes over $89,075 ($178,150 for married couples filing jointly);
  22% for incomes over $41,775 ($83,550 for married couples filing jointly);
  12% for incomes over $10,275 ($20,550 for married couples filing jointly).
  The lowest rate is 10% for incomes of single individuals with incomes of $10,275 or less ($20,550 for married couples filing jointly).
• For 2022, as in 2021, 2020, 2019 and 2018, there is no limitation on itemized deductions, as that limitation was eliminated by the Tax Cuts and Jobs Act.

 

[DeputyDog]

I have an interesting situation with my Severance and my MSC didn't really have a clear answer for me.

To keep it as simple as possible....
I was awarded 100%P&T per the VA/ 0% from the DoD for my disqualifying disability. Also note, my boardable disability was deemed "not rated" by the VA.
We're trying to find out if I have to pay this dang severance back or not! As an E-7 with 11 years of service its not a small amount of pennies.

 

[Provis]

I have an interesting situation with my Severance and my MSC didn't really have a clear answer for me.

To keep it as simple as possible....
I was awarded 100%P&T per the VA/ 0% from the DoD for my disqualifying disability. Also note, my boardable disability was deemed "not rated" by the VA.
We're trying to find out if I have to pay this dang severance back or not! As an E-7 with 11 years of service its not a small amount of pennies.

You will not have to

 

[DeputyDog]

You will not have to

My pea sized brain just has such a hard time believing that could be true! I'm not arguing it by any means though! As I dig and read though, all roads point to me not paying it back which is mind boggling.

 

[RonG]

My pea sized brain just has such a hard time believing that could be true! I'm not arguing it by any means though! As I dig and read though, all roads point to me not paying it back which is mind boggling.

I agree with Provis.
Recoupment: VA M21-1, describes recoupment for disability severance pay by the VA.

Reference: M21-1, Part III, Subpart v, Chapter 4, Section B - Recoupment of Separation Benefits
LINK <----

Ron

 

[RetiredColonel-MikeT]

@RonG it great reference link there, I knew under NDAA 2008 that if the condition that caused you to be separated occurred in a "combat-ZONE" as defined by SECDEF, there would not be any recoupment, nor taxing for that matter. Unfortunately, this change went in AFTER I had a problem with a Warrior in Transition where I gave him the gross amount and told him "subject to withholding" - he claimed I never stated that. So I drafted a memo from that point on showing that verbiage. He was odd in the first place and tbh, I wasn't surprised he tried to pull a fast one.

 

[whillythekid]

Is it the base pay of the month times 2 or your biweekly pay times 2

 

[RonG]

Is it the base pay of the month times 2 or your biweekly pay times 2

Calculation and Payment​

Disability severance pay is a one-time lump sum payment. The amount equals 2 months of basic pay for each year of service which includes active service and inactive duty points, but the total service years cannot exceed 19 years. Additionally, the minimum number of years required for computation purposes is six years for a disability incurred in the line of duty in a combat zone, or 3 years in the case of any other member. Prior to January 28, 2008, a maximum of 12 years and minimum of three years creditable service was used.

Info from DFAS.

Comment: It has nothing to do with the day(s) of month when you receive your pay. It is two months of basic pay, etc.

Ron

 

[RetiredColonel-MikeT]

Calculation and Payment​

Disability severance pay is a one-time lump sum payment. The amount equals 2 months of basic pay for each year of service which includes active service and inactive duty points, but the total service years cannot exceed 19 years. Additionally, the minimum number of years required for computation purposes is six years for a disability incurred in the line of duty in a combat zone, or 3 years in the case of any other member. Prior to January 28, 2008, a maximum of 12 years and minimum of three years creditable service was used.

Info from DFAS.

Comment: It has nothing to do with the day(s) of month when you receive your pay. It is two months of basic pay, etc.

Ron

So many great things came out of NDAA 2008. I had an O-4 who opted not to fight his 20%, he was pre-NDAA-2008 and he still ended up with approx $115k. He had around 18 years, such a waste of a career, just to cash it out, but, that's what he wanted. If he was post-NDAA-2008, not only would have gotten close to $200k, he would not have had to pay taxes on it NOR pay it back.

 

[Scoob19]

Is DOD medical severance check counted as annual income. I ask this because MCCS is trying to use my severance check as a basis to increase child care fees.

 

[RonG]

Is DOD medical severance check counted as annual income. I ask this because MCCS is trying to use my severance check as a basis to increase child care fees.

The disability severance pay is non-taxable for combat related injuries.. The Combat-Injured Veterans Tax Fairness Act of 2016, went into effect in 2017. Under this federal law, Veterans who suffer combat-related injuries and are separated from the military are not to be taxed on the one-time lump sum disability severance payment they receive from the Department of Defense. This law instructs DoD to identify Veterans who were taxed in order for them to file an amended return to receive their refund. Go to LINK —->Combat-Injured Veterans Tax Fairness Act Claim Information for more details.

It is a one-time payment; it is not a continuing annual payment.

I have no legal expertise.

Ron