More than 130,000 veterans are receiving letters on how to apply for refunds of taxes they paid on disability severance pay dating back to 1991 — a minimum of $1,750 per veteran.

While exact estimates were not available, because each veteran’s payout varies, the government could be paying out a minimum of $228 million in tax refunds, if all those eligible file claims.

The eligible veterans will have a year after the date of their letter from the Defense Department to file a claim for the refund, or three years after filing their tax return that reported the disability severance pay, whichever is later. Survivors of those who paid the taxes are also eligible for the refund, which would be paid to the estate of the veteran.

The mailings to 130,062 veterans started on July 9, and are scheduled to be completed by July 20. The letters are being sent by the Internal Revenue Service on behalf of the Defense Department, because the IRS maintains the last known addresses of taxpayers, said Army Lt. Col. David Dulaney, executive director of the Armed Forces Tax Council.

These refunds are the result of a law passed in 2016 — the Combat Injured Veterans Tax Fairness Act of 2016 — which applies to veterans who received this pay dating back to Jan. 17, 1991, with taxes withheld. By law, DSP is not taxable if:

  • The DSP is paid for combat-related injuries determined by the military service at the time of separation, or
  • The veteran is eligible for disability compensation from the Veterans Affairs department.

In the vast majority of these cases, the veteran was notified of his or her eligibility for disability compensation long after the taxes were withheld from the DSP, Dulaney said. At that time, it could take many months for the veteran to receive notification of eligibility for disability compensation.

Now, because of changes in processes between DoD and VA, going forward veterans will likely receive notification as early as a month after separation. In addition, the Defense Finance and Accounting Service will be able to determine from those processes whether the DSP would be taxed. Even for those separating since last year with DSP, the vast majority have not been taxed, Dulaney said. He said 97 percent of those who have received DSP in 2018 haven’t had tax withheld.

How to file a claim

The DoD letter to veterans includes instructions for submitting a claim for the tax refund, using IRS Form 1040X.

Veterans can apply for the refund by submitting a claim based on their actual DSP, and actual taxes withheld. But as Dulaney noted, many people don’t have documentation or tax records dating back to 1991, and the IRS doesn’t keep records beyond seven years.

So the IRS has also approved a simplified method for veterans who don’t have their documentation, allowing those who received this DoD letter to apply for a standard refund based on the year when they received their DSP. Anyone who received a notification letter from DoD is eligible to do this. This is the easiest way to apply for the refund, according to IRS officials, because the veteran doesn’t need to have access to the original tax return from the year of their lump-sum disability severance payment.

Here are the standard refund amounts for those using the simplified IRS method for filing the claim:

Tax year when disability compensation payment was receivedAmount of tax refund

Veterans who received a DoD notification letter should write either “Veteran Disability Severance” or “St. Clair Claim” across the top of the front page of their Form 1040X, amd 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

Think you should get a bigger refund?

The DSP is calculated based on the service member’s basic pay at the time, so some veterans may be qualified for a bigger refund than the standard refund agreed to by the IRS. Those who believe they are qualified for a bigger refund can submit documentation with their claim.

Disability severance pay is generally taxable, Dulaney said, but there are certain instances when it’s not taxable, such as when the injury related to the DSP was incurred as a direct result of armed conflict, while engaged in extra hazardous service; or during simulated war exercises; or when harmed by an instrument of war.

Didn’t receive a letter?

Veterans who believe they are eligible for a refund, but didn’t receive a DoD notification letter — and don’t have the required documentation to file a claim for a refund should contact the National Archives, National Personnel Records Center, or the VA.

Further information is available:

Of the 300,000 veterans who received the disability severance payment since 1991, DoD identified 130,062 veterans who qualify for the refunds.

The law went into effect in 2017. DoD was able to identify the 130,062 veterans in late 2017, and has been working with the IRS to finalize the process for veterans to file claims for their refunds, Dulaney said.

Karen has covered military families, quality of life and consumer issues for Military Times for more than 30 years, and is co-author of a chapter on media coverage of military families in the book "A Battle Plan for Supporting Military Families." She previously worked for newspapers in Guam, Norfolk, Jacksonville, Fla., and Athens, Ga.

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