Is my military disability retirement taxable?

R

rjham

PEB Forum Regular Member
Registered Member
Hello - First time caller - long time fan.

Can someone please help me understand whether or not my military disability retirement will be taxable? Details are below:

23+ years active service

Information from retirement orders:
Military percentage of disability = 90%
VA Disability = 100%
Retirement type and allotment code: Perm disability/9
Disability is based on injuries received as a direct result of armed conflict: Yes
Disability resulted from a combat related injury as defined in 26 USC 104: Yes

Would appreciate any clarification.
 
Your DFAS retirement is taxable, VA pension is not.
 
Thanks tony292. I am attempting to reconcile your comment with the information provided by DFAS:

**********
TDRL/PDRL Exemption: If you retired under a disability law (Temporary Disability Retirement List or Permanent Disability Retirement List), your retired pay will be fully non-taxable if your pay is calculated based upon your military (not VA) disability percentage and you meet one of the following conditions:
  • You were in the military or under a contractual obligation to join the military on September 24, 1975, or
  • Your military disability rating is combat-related
*************
https://www.dfas.mil/retiredmilitary/manage/taxes/isittaxable.html

I am on PDRL and disability rating is combat related.
 
Have you applied for CRSC. When DFAS pay CRSC it is tax free.
 
That's a great question. If my disability pension is taxed, I would apply for CSRC. If its not taxable, I would best benefit from CDRP.

I pasted an excerpt from dfas.mil - I am PDRL, combat related, 90% Military percentage (not VA), how do I not fit into the conditions listed in the exemption? Very confusing.
 
From DFAS:
[start of quotation]
For members who retired under the Temporary Disability Retired List or the Permanent Disability Retired List, retired pay taxable income is reduced by whichever of the following is greater:
  • The amount of VA compensation received [most common]
  • or
  • A tax-exempt amount of gross pay determined by the following formula:
Step 1:
Military (not VA) disability percentage: %
x (times) Active Duty pay at the time of retirement:
= (equals) Initial amount of tax-exempt gross pay

Step 2:
Initial amount of tax-exempt gross pay:
x (times) applicable Cost-Of-Living-Adjustment (COLA): %
= (equals) Current tax-exempt gross pay

This information is reported by DFAS on your 1099-R. [end of quotation]
Ref: https://www.dfas.mil/retiredmilitary/manage/taxes/isittaxable.html

----
Related information:
As a CH 61 retiree in receipt of VA compensation, you will waive retired pay dollar for dollar in the amount of VA compensation received. CRDP can restore the dollar amount of the longevity portion (LOS) of the waived retired pay. CRDP does not restore waived DoD disability retired pay and CRSC does not replace it either; the limitation is the dollar amount of the longevity portion (LOS) of the retired pay. (Other limitations apply as well, such as the percentage of approved combat related disabilities.)

Your case is somewhat different (>20 AD) than what is most often seen in this forum and similar sites elsewhere.
Here is an excerpt from a computation from last December. The amounts do not pertain to your case, but the concept could apply.

[excerpt]
You should receive from DoD and VA an amount equal to your approved CRSC for combat related ($3900) and your LOS ($4977)

$3900 + $4977 = $8877

Breakout:
--$3900 from the VA (100% total rating)
--$2,580 in DoD residual disability retirement ($6480 DoD pay - $3900 VA comp offset)
--$2397 in CRSC [end]
This was only a part of the case presented. He chose CRSC rather than CRDP.

Good luck,
Ron
 
Thanks RonG.

I appreciate the breakdown. If I follow your example correctly, the $3900 from the VA is tax-exempt, the $2580 DOD residual disability retirement is tax-exempt, and the $2397 CRSC is tax exempt. This would make the entire annuity tax-exempt, provided the percentage of approved combat related disabilities is greater than the percentage based on length of service. Is that an accurate summary?

Best, Ted
 
Hello Ted,

I am not sure that is accurate. I never looked into that matter until I saw your post, although I have seen it discussed. I have a regular retirement, so I do not personal experience in that area. I have a 100% CRSC rate which is more than my retired pay, so all my pay from DFAS is CRSC (i.e., same amount of former retired pay). I have no residual retired pay.

Since a retiree in the example I provided earlier already benefits from nontaxable CRSC which replaces some of all of the waiver, it seems the tax computation might involve that factor.

The retired officer whose pay was the basis for that computation (see excerpt above) still visits this forum occasionally. I will ask him for his comments on the matter. Also, there might be another CH 61 with >20 years AD who sees this and comments. I'll pursue it a bit more later today...

Thank you for your question. I provided the excerpt to show how CRSC might be computed in your case (the results), but your question about taxes is perfect.

Regards,
Ron
 
ALCON,

Former Navy JAG at OJAG Code 16 (Formal Physical Evaluation Boards) here.

All separation pay and retired pay stemming from a combat-related disability is tax-free, regardless of whether you're getting it through CRDP or some other program. The statute you're looking for is 26 USC 104, which both defines "combat-related" in section (b)(3) and states that those funds are tax-free in section (a)(4). It's an unusually confusing statute, which is why DFAS put out the plain-text reading of it that other folks mentioned earlier.

If you want a more detailed breakdown on the background and impact of CRDP, the Congressional Research Service put out a really great deep dive last November, available here: https://fas.org/sgp/crs/misc/R40589.pdf. Page 16 talks about the two ways to calculate a Concurrent Receipt retirement check, and specifically notes that "The retired pay computed under the disability formula is fully taxed UNLESS the disability is the result of a combat-related injury." (emphasis added)

I've got a quick and dirty calculator that I stole from DFAS on my way out the door last year. If you send me a private message with your base pay and your years/months of service, I can give you some numbers on whether it's better to take CRDP or CRSC. You're right, though - it's almost certainly going to be better for you to take Concurrent Receipt.

V/r,
Matt
 
Information related to the discussion in this thread.

Reference 1: DoD 7000.14-R Financial Management Regulation Volume 7B, Chapter 24
http://comptroller.defense.gov/Portals/45/documents/fmr/Volume_07b.pdf

2402
"The gross retired pay of a member is not subject to FITW if the member’s retired pay is computed only on the basis of percentage of disability, and the member is on the temporary or permanent disability retired lists, if: ...
C. The member receives disability retired pay because of a combat-related injury. The term “combat-related injury” means personal injury or sickness incurred as a direct result of armed conflict, or while engaged in extra hazardous service, or under conditions simulating war, or caused by an instrument of war. This determination is made by the applicable Service at the time of discharge. See Department of Defense Instruction (DoDI) 1332.18.
[Note: This is only an excerpt; see reference at top for more.]

Reference 2: Department of Defense Instruction (DoDI) 1332.18. , Subject: SUBJECT: Disability Evaluation System (DES) [see APPENDIX 5 TO ENCLOSURE 3 ADMINISTRATIVE DETERMINATIONS ]
http://warriorcare.dodlive.mil/files/2016/03/DoDI_1332.18.pdf

[from Appendex 5] "2. DETERMINATIONS FOR FEDERAL TAX BENEFITS. Disability evaluation includes a determination and supporting documentation on whether the Service member’s disability compensation is excluded from federal gross income in accordance with Reference (e). For compensation to be excluded, the Service member must meet the criteria in either paragraph 2a or 2b of this appendix."
[from Appendiz 5] 2b
"b. Combat Related. This standard covers injuries and diseases attributable to the special dangers associated with armed conflict or the preparation or training for armed conflict. A disability is considered combat-related if it makes the Service member unfit or contributes to unfitness and the preponderance of evidence shows it was incurred under any of the following circumstances. ..."

Ron

Note: I did not see an example computation in the DODI document.
 
Ron and Matt, Thanks for your interest and assistance. The confusion lies within all the variables. My retirement falls under 26 USC 104 per my retirement orders. My military disability retirement is 90% (capped at 75%) and my length of service percentage is roughly 58%. My V1/V3 disability is rated at 70%. With the references here it reads as if the disability retirement given its combat nature and its rating of 70% as adopted by DoD, the military payments will not be taxable. I am on terminal leave and don’t hit the retirement roll until September 16th. I am making employment decisions and if taxable at the federal level some states tax as well (e.g. Oregon). Best, Ted
 
[partial quotation]

"Former Navy JAG at OJAG Code 16 (Formal Physical Evaluation Boards) here.
I've got a quick and dirty calculator that I stole from DFAS on my way out the door last year. If you send me a private message with your base pay and your years/months of service, I can give you some numbers on whether it's better to take CRDP or CRSC. You're right, though - it's almost certainly going to be better for you to take Concurrent Receipt.
V/r, Matt"

Excellent information. I get lost reading many of the U.S. Codes. Just an added comment that in no case can the amount of CRDP or CRSC exceed the dollar amount of the longevity portion of the retired pay. You did not suggest that they did, but it is a confusing issue.
--CRDP is a restoration of waived retired pay (disability retired pay not included)
--CRSC is a replacement of waived retired pay (disability retired pay not included)


Ron
Former Army Deputy Finance Officer and C, Fin Ops
 
Concur - neither can take you above what you would have recd based on LOS. The difference though is that CRDP takes the tax status of the funds it is restoring. If the military disability retirement is not taxable the CRDP is not taxable.
 
Ron,

That's an important clarification, absolutely. I'm going to run the numbers below to discuss why that's so significant. You quoted the DODIs earlier, and I always find them to be helpful. They're definitely easier to read, that's for sure. Important to remember that the IRS isn't bound by DoD Instructions, though, so I always go to the US Codes whenever possible. You can quote Title 26 at the IRS and they'll actually listen.

Ted,

Yep, it's super confusing. I'm going to throw out some numbers to hopefully help clarify. I'm going to assume that your base pay at the time of retirement is an even $10,000 per month and that you served exactly 23 years, for simplicity's sake. Also assuming you're not married and have no kids, for VA pay purposes. Obviously, those assumptions may be wrong and that would change the calculus.

First, VA pay. 100% with no dependents comes out to $2974 in 2018.

Then, DoD retirement pay. There are two important numbers here, and DFAS will calculate both of them. Your longevity retirement number is $5750. That's 2.5% of your base pay for every year you served. Your disability retirement number is $7500. That's your base pay times your disability percentage - though, as you noted before, that gets capped at 75% instead of going all the way up to 90%. Hence the $7500 instead of $9000.

DFAS chooses the one that's best for you. In this case, they choose the disability number of $7500.

Now, most disability retirees don't get full VA pay and full DoD retirement pay. For every dollar of VA pay you get, you have to waive your right to a dollar of retirement pay. That happens to you, too, though it only happens for a second. DFAS is going to take $2974 away from your $7500.

Here's where Concurrent Receipt comes in. Because you served for more than 20 years, DFAS will then give some of that money back to you. As Ron noted, this is a restoration of your waived retirement pay. It's not new money - it's just money that DFAS took away for a second and then gave back.

They're not allowed to give it ALL back. The maximum amount they're allowed to give back is the amount that gets you back up to your longevity retirement number, which was $5750. So that's exactly what they do.

So, end of the day, what you end up with is:
$2974 in VA pay (never taxed)
PLUS
$5750 in disability retirement pay (not taxed because it's combat-related)

Note: even though your retirement pay is the same dollar amount as your longevity retirement, it's actually disability retirement money. Remember, DFAS chose the disability retirement option for you because it was a bigger number, then took some money away, then put some money back. But it always stayed disability money, which is why it never gets taxed.

You'll get two checks every month, which combine to $8724. The total taxable amount, federally, is $0.

Now, you also mentioned state taxes. I'm a Florida barred attorney, so I can't comment on Oregon state taxes. I'd be very surprised if they took any of that money, though. I don't know of any states that tax combat-related disability pay.

I hope that all makes sense.

V/r,
Matt
 
Matt, Great lay down. Thank you for taking the time to craft your response. This is what I pieced together but until now couldn’t get anyone to validate my understanding. Oregon taxes only what the federal government taxes when it comes to disability. I will update this board with any future communication from DFAS. Matt and Ron - thanks for the assist.
 
Easy day, Ted. Genuinely, thank you for your service. 23 years is nothing to smirk at - that's a hell of a contribution. Congratulations on a well-deserved retirement.
 
Matt Kozyra said:
ALCON,

Former Navy JAG at OJAG Code 16 (Formal Physical Evaluation Boards) here.

All separation pay and retired pay stemming from a combat-related disability is tax-free, regardless of whether you're getting it through CRDP or some other program. The statute you're looking for is 26 USC 104, which both defines "combat-related" in section (b)(3) and states that those funds are tax-free in section (a)(4). It's an unusually confusing statute, which is why DFAS put out the plain-text reading of it that other folks mentioned earlier.

If you want a more detailed breakdown on the background and impact of CRDP, the Congressional Research Service put out a really great deep dive last November, available here: https://fas.org/sgp/crs/misc/R40589.pdf. Page 16 talks about the two ways to calculate a Concurrent Receipt retirement check, and specifically notes that "The retired pay computed under the disability formula is fully taxed UNLESS the disability is the result of a combat-related injury." (emphasis added)

I've got a quick and dirty calculator that I stole from DFAS on my way out the door last year. If you send me a private message with your base pay and your years/months of service, I can give you some numbers on whether it's better to take CRDP or CRSC. You're right, though - it's almost certainly going to be better for you to take Concurrent Receipt.

V/r,
Matt
Click to expand...
Indeed, I definitely concur!

Thus, I quite often comment that "possessing well-informed knowledge is truly a powerful equalizer!"

Best Wishes!
rjham said:
Hello - First time caller - long time fan.
Can someone please help me understand whether or not my military disability retirement will be taxable? Details are below:

23+ years active service

Information from retirement orders:
Military percentage of disability = 90%
VA Disability = 100%
Retirement type and allotment code: Perm disability/9
Disability is based on injuries received as a direct result of armed conflict: Yes
Disability resulted from a combat related injury as defined in 26 USC 104: Yes

Would appreciate any clarification.
Click to expand...

Welcome to the PEB Forum! :)

To validate @Matt Kozyra's clarified feedback above...

In retrospect with 26+ years of AFS (and 32 years of military service in total), excerpts from my military disability retirement orders state:
  • Disability is based on injury or disease received in the line of duty as a direct result of armed conflict or caused by an instrumentality of war and incurred in the line of duty during a period of war as defined by law: Yes
  • Disability resulted from a combat-related injury as defined in 26 USC 104: Yes
In summary, I currently receive DFAS CRDP with a FITW exemption since a combat-related injury finding by the IPEB was determined during the DoD IDES process while on military active duty in 2013. Upon completion of the DoD IDES process in 2014, I was placed onto the DoD military TDRL and have been on TDRL for over four years to date. I am currently experiencing my third TDRL re-evaluation and have received my TDRL USAPEB Final Re-evaluation findings via the DA Form 199. As such, I am awaiting a review of the aforementioned DA Form 199 findings via an USAMEB Counsel Office.

Therefore, as based upon the information provided, it would seem that you too should be eligible for DFAS CRDP with a FITW exemption (e.g., CRDP without any federal income taxation). Congratulations and enjoy! Take care!

Thus, I quite often comment that "possessing well-informed knowledge is truly a powerful equalizer!"

Best Wishes!
 
Last edited:
Warrior644 said:
In retrospect with 26+ years of AFS (and 32 years of military service in total), excerpts from my military disability retirement orders state:
  • Disability is based on injury or disease received in the line of duty as a direct result of armed conflict or caused by an instrumentality of war and incurred in the line of duty during a period of war as defined by law: Yes
  • Disability resulted from a combat-related injury as defined in 26 USC 104: Yes
Click to expand...

Thanks Warrior644. Those are indeed the statements on my retirement orders. Best, Ted
 
rjham said:
Thanks Warrior644. Those are indeed the statements on my retirement orders. Best, Ted
Click to expand...
Indeed, you are welcome! Take care and enjoy!

Thus, I quite often comment that "possessing well-informed knowledge is truly a powerful equalizer!"

Best Wishes!
 
tony292 said:
Your DFAS retirement is taxable, VA pension is not.
Click to expand...
I finished the MEB process and was awarded 90% DOD. My retirement date is 17 July 2024. I start terminal leave 16 April. I am currently going through the Special Selection Board for LTC. The board is scheduled to happen the first week of May 2024. Do I need to let HRC know that I have a retirement date before being selected by the SSB?
 
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