Possible Tax Benefit For Retroactive Pay;researching!

[cowgirl]

On other forum found mention of Internal Revenue 78-161, related to Stickland Decision. suggests that retro compensation may be excluded. I will contact DFAS tommorow to see if its true. Found the information when googlin' "computing VA back pay" mentioned in 31 July post. Will update when possible here.If yer like me, less taxes is just dandy. g'nite,cg

[cowgirl]

Oops; please edit :) Strickland; not stickland; my bad,cg

[allan]

Hello Cowgirl,

Veterans do not pay taxes on retro pay or monthly awards.

Allan

[mountain tyme]

Rev. Rul. 78-161

1978-1 C.B. 31

Sec. 104

Caution: Distinguished by Rev. Rul. 80-9

IRS Headnote

Armed Forces retirement pay; retroactive disability determination. The Service will follow the Strickland decision as precedent in holding that a taxpayer, who retired from a branch of the Armed Forces in 1976 for years of service and subsequently was awarded a retroactive service connected disability rating by the Veterans' Administration, may exclude from gross income under section 104(a)(4) of the Code that portion of the retirement pay received from the branch of the Armed Forces during the retroactive period that corresponds to the amount attributable to the Veterans' Administration disability rating; Rev. Rul. 62-14 revoked.

Full Text

Rev. Rul. 78-161 [fn1]

Advice has been requested whether, under the circumstances described below, a taxpayer may by reason of a retroactive disability compensation determination by the Veterans' Administration, exclude from gross income under section 104(a)(4) of the Internal Revenue Code of 1954, any portion of the payments made to the taxpayer during the retroactive period by a branch of the Armed Forces as retirement pay based on years of service.

The taxpayer retired from the United States Army on January 1, 1976, for years of service and began receiving retirement pay. On February 15, 1976, the taxpayer applied to the Veterans' Administration for service connected disability benefits and was awarded, on December 1, 1976, a 90 percent disability rating retroactive to February 28, 1976. In order to receive actual payment of the benefits the taxpayer filed, on December 15, 1976, a waiver, pursuant to section 1005 of the Veterans' Benefits Act of 1957, 38 U.S.C. 3105, for reduction of the taxpayer's retirement pay in an amount equal to the disability compensation benefits. Effective from the date of the waiver the taxpayer began receiving disability compensation from the Veterans' Administration and reduced retirement pay from the Army.

Section 61(a) of the Code provides that unless otherwise excluded by law, gross income means all income from whatever source derived, including compensation for services.

Section 104(a)(4) of the Code and the regulations thereunder provide, with certain exceptions not pertinent to this case, that gross income does not include amounts received as a pension, annuity, or similar allowance for personal injuries or sickness resulting from active service in the armed forces of any country.

Section 3010(a) of title 38 U.S.C. provides, in part, that payments due or to become due under any law administered by the Veterans' Administration shall be exempt from taxation.

Rev. Rul. 62-14, 1962-1 C.B. 11, holds, in part that, when a taxpayer is awarded disability compensation by the Veterans' Administration, no portion of the regular Army retirement pay based on years of service previously received is excludable from gross income even though the effective date of the award is made retroactive.

In Strickland v. Commissioner, 540 F.2d 1196 (4th Cir. 1976), the taxpayer retired from the Army for length of service and began receiving retirement pay. Subsequently, the taxpayer applied to the Veterans' Administration for service connected disability benefits and was awarded a 10 percent disability rating. In order to receive actual payment of the benefits the taxpayer filed the required Veterans' Administration form on March 10, 1965, waiving that portion of Army retirement pay equal to the amount of the Veterans' Administration disability benefits. In March 1966 the taxpayer filed a second claim with the Veterans' Administration requesting an increase in disability benefits. On January 17, 1967, the Veterans' Administration notified the taxpayer that the taxpayer was awarded a 100 percent disability rating, as of March 28, 1966, entitling the taxpayer to an additional $208 per month disability benefits. The Veterans' Administration commenced this benefit on February 1, 1967, after the Army notified the Veterans' Administration that it would correspondingly reduce the taxpayer's retirement pay. The court held that the Veterans' Administration's retroactive determination that the taxpayer was eligible for increased disability benefits was controlling. Thus, the taxpayer was entitled to exclude from gross income under section 104(a)(4) of the Code, part of the payments previously received as retirement pay based on rank and length of service.

The Internal Revenue Service will follow the decision of the United States Court of Appeals for the Fourth Circuit in Strickland as precedent in the disposition of similar cases involving section 104(a)(4) of the Code.

Accordingly, in the instant case, the taxpayer may exclude from gross income under section 104(a)(4) of the Code, that portion of the taxpayer's Army retirement pay received between March 1, 1976 and December 15, 1976, that corresponds to the amount attributable to the Veterans' Administration disability rating.

Rev. Rul. 62-14 is revoked.

[fn1] Also released as News Release IR-1979, dated March 31, 1978.

[jimmy]

Cowgirl, Here is how DFAS, VA and the IRS explained it to me. Let us know if you are told something different. It is interesting that the VA shaves the pennies off each month amount due - I wonder how much they take by doing that.

From all of them: any payment from the VA is taxfree. On the spreadsheet breaking out your retro award the last colum shows amount due from the VA -- so it is taxfree.

DFAS will not go back and issue updated 1099Rs. DFAS and IRS said for prior year tax returns you need to file amended returns and cite the strikland decision as the reason your retired pay is reduced. The spreadsheet lays it out month by month so it is easy to calculate the reduced amount. It is just like your current VA waiver amount from your RAS. You just subtract the CRDP amount from your VA award and reduce your monthly retirement pay. I received my retro this year, filed my amended returns using this guidance and I have already received my refund from the IRS :)

DFAS won't go back and update the RAS for the current year so the 1099R won't reflect any VA waiver from the retro. The IRS told me to do the same adjustments for months that DFAS didn't subtract the VA waiver on the RAS. They said to put the 1099R amount on the total pension line(a) and on the taxable line (;) to put the adjusted amount.

[Ron II]

Hello Cowgirl,

Veterans do not pay taxes on retro pay or monthly awards.

Allan

Obviously you are correct; however, in another post CG was asking about the taxability of CRDP (Concurrent Receipt of of Disability Pay)--retired pay for service plus disability pay when the level is 50% or more-- which is fully taxable. I'm not sure if payment by the VA, which is discontinued upon receipt of CRDP, is being confused with the CRDP itself which is paid by DFAS.

[jimmy]

Here is how CRDP being taxed was explained to me. Before CRDP retirees had to give up $1 of retired pay for every $1 of VA payment (called VA waiver). So if a retiree got $2000 in retiremnet pay and $1000 in VA payment, they would waive $1000 from retired pay to get the taxfree $1000 VA payment. They would end up getting $1000 retired pay and $1000 VA award for a total of $2000 a month, but only have $1000 in retired pay taxed.

Under CRDP, the retiree would not have to waive the dollar for dollar amount to get the VA payment but they would have to pay taxes on all the retirement pay. They would get their entire $2000 retired pay that is all taxable and the $1000 VA payment that is taxfree for a total of $3000 a month.

Since CRDP is phased in over 10 years, retirees wont get to keep their entire retired pay and VA award until 2014. Until then they get a portion of their CRDP and their retire pay is reduced by the remaing VA waiver amount which reduces the taxable amount.