Veterans could be getting a few extra dollars in their pockets. The Internal Revenue Service announced that tax relief is available for veterans who received disability severance pay after January 17th, 1991 and included that payment as income on their taxes. This is a result of the Combat-Injured Veterans Tax Fairness Act passed in 2016.
Veterans should file Form 1040X, Amended U.S. Individual Tax Return, to claim a credit or refund of the over-payment attributable to the disability severance payment. Most veterans who received a one-time lump-sum disability severance payment when they separated from their military service will receive a letter from the Department of Defense. The letter will explain how to claim the tax refunds they are entitled to. The explanation will include a simplified method for making the claim. The IRS is working closely with the Department of Defense to produce these letters, and the explanation of how the veterans should claim the tax refund.
Veterans should act fast however, as the amount of time for claiming these tax refunds is limited. The law grants veterans an alternative time frame- one year from the date of the letter from the Department of Defense. Veterans making these claims have the normal limitations period for claiming a refund or one year from the date of the letter, whichever expires later. Taxpayers can usually only claim tax refunds within 3 years from the due date of the return. The alternative time frame is especially important since some of the claims may be for refunds of taxes paid back as far as 1991.
Veterans can submit a claim based on the actual amount of their disability severance payment by completing Form 1040X. Veterans also can choose a simplified method, which is a standard refund amount based on the year in which they received the severance payment. For this method, veterans just must write “Disability Severance Payment” on line 15 Form 1040X and enter on lines 15 and 22 the standard refund amount. The payments are as listed:
- $1,750 for tax years 1991 – 2005
- $2,400 for tax years 2006 – 2010
- $3,200 for tax years 2011 – 201
Claiming the standard refund amount is the easiest way for veterans to claim a refund, because they do not need to access the original tax return from the year of the lump-sum payment. Veterans eligible for a refund who do not receive a letter from the DoD may still file Form 1040X to claim the refund but must include both a copy of documentation showing the exact amount of and reason for the disability severance payment and a copy of either the VA determination letter confirming the veteran’s disability. You can read more about special tax benefits for those in the armed forces here.