Veterans may be eligible for tax refund on disability severance payment

MOUNTAIN HOME, Ark. - Thomas J. Stickles Jr. served as a staff sergeant in the U.S. Marine Corps in the Iraq and Afghanistan Wars.

He was injured while serving, discharged in 2010, and given a disability severance payment.

"It was over $70,000. Then of course with all the taxes taken out I didn't see that. And then when the VA came around I ended up getting VA disability as well."

He says he didn't ask any questions about the tax deduction at the time.
But just recently he read that the U.S. Department of Defense is sending letters to certain veterans that they can claim a tax refund.

Here is a statement from the DoD and how you can get a refund if you believe you are eligible:

PURPOSE: To provide information on the DoD’s efforts to notify identified Veterans about their ability to seek a tax refund for overpayments of tax on their Disability Severance Pay (DSP), in
accordance with the Combat Injured Veterans Tax Fairness Act of 2016 (CIVTFA).

BACKGROUND: In accordance with tax law, DSP is not taxable if either: 1) the DSP paid for combat-related injuries determined by the Service at separation or; 2) the Veteran is eligible for
disability compensation from the Department of Veterans Affairs (VA). The CIVTFA required the DoD to identify any Veterans that received DSP since January 17, 1991 who had tax withholdings applied to their DSP and notify the identified Veterans on how to claim a tax refund for their overpayment of tax on DSP.

KEY POINTS:
• Since the enactment of the CIVTFA on December 16, 2016, the DoD has identified more than 130,000 Veterans whose DSP was taxed that may be eligible for a tax refund attributable to their DSP.
• Starting on July 9, 2018, the DoD began individually notifying the identified Veterans by letter
through the US Postal Service. The DoD letter was mailed per the following schedule:
• The identified Veterans will have one year from the date of the DoD notification letter to file for
their refund, or three years since filing their tax return that reported their DSP, whichever is later.
• The DoD letter included instructions, approved by the IRS, for Veterans to follow in order to receive their refund.
o Veterans can submit a claim based upon their actual DSP by completing an amended tax return on Form 1040X.
o However, the IRS has approved a simplified method by which Veterans can claim a standard refund amount on Form 1040X based upon when they received DSP.
 $1,750 for tax years 1991 – 2005
 $2,400 for tax years 2006 – 2010
 $3,200 for tax years 2011 – 2016
o 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 they received DSP.
o Veterans can submit a claim for the standard refund amount even if they have already filed a claim for the actual amount. In this instance, Veterans can only claim the difference between the standard refund amount above the amount previously claimed attributable to DSP.
o Veterans claiming refunds for tax overpayments attributable to taxation of their DSP should write either “Veteran Disability Severance” or “St. Clair Claim” across the top of the front page of their Form 1040X, and mail the Form 1040X and a copy of the DoD notification letter
to:
Internal Revenue Service
333 W. Pershing Street, Stop 6503, P5
Kansas City, MO 64108.

• Veterans that did not receive the DoD letter may still be eligible for a refund. These Veterans can file an amended tax return on Form 1040X with the following documentation to verify the DSP and its eligibility for tax exclusion:
o A copy of DD Form 214 or other documentation from the Defense Finance and Accounting Services (DFAS) showing the exact amount and reason for DSP and
o A copy of either the VA determination letter confirming disability compensation eligibility or a determination by the Service at the time of separation that the injury related to the DSP was
incurred:
 as a direct result of armed conflict, while engage in extra hazardous service; or
 during simulated war exercises; or
 by an instrumentality of war.
• Veterans that did not receive the DoD letter and do not have the required documentation to file a claim for refund should contact the National Archives, National Personnel Records Center, or the
Department of Veterans Affairs.
• Veterans can receive further information regarding the CIVTFA and the procedures for filing a claim for refund for overpayments of tax related to DSP by going to the following websites:
o DFAS (https://www.dfas.mil/dsp_irs.html) or
o IRS https://www.irs.gov/individuals/military/combat-injured-veterans-tax-fairness-act-claiminformation-available).

Stickles believes he is eligible, but did not receive a letter.

"Called H and R Block and asked them and they said, 'Yeah you're the first one to contact us. We found out about it this morning,'" he said.

If they've done the math right, he should be getting more than $15,000.

A veteran's disability severance payment is not taxable if they also received VA disability compensation.

A law was passed in 2016 that veterans who fall under this category and received their payment with tax deducted between 1991-2016, can get a tax refund.

Now Stickles is working to get his refund and encouraging others to do the same.

Stickles said, "There's a lot of veterans out there that I see, and it hurts me to see that a lot of these guys could be homeless. And that's money deep down that they could've had. Or now fortunately they will hopefully see that it's there, and it's going to be there hopefully for the ones that fall in that category."

The executive director with the Armed Forces Tax Council said the taxes were withheld from the payments in accordance with the law, but it was up to the veteran to seek a refund through a tax return if they later received VA disability compensation.

But Stickles said no one told him that.

"You always hear about you're supposed to take care of veterans. You know they've done this and done that. And it's almost a blame game. Pointing the finger," he said.