Explanation of Disability Compensation

[Scottish_Knight]

Right then,

last year I won my CUE claim with the help of many here and I received a nice amount of retro pay.  Well, I did my German taxes earlier this year and needless to say, that Retro Pay got some attention.  In the past, I claimed my retirement and disability and it went smoothly.  These are not taxed here in Germany, but I simply need to report the income.  Seems someone at the German Tax Office (Finanzamt) didn't understand the treaty between the USA and Germany, so I was sent a bill for 11000 Euros!  I've had to hire a tax expert and this has actually become work. 

One of the things I need and cannot find is an explanation on the disability compensation system.  Germany recognises military injuries and illnesses much like the Americans.  Their's go two ways. One is for life and the other is term or limited until retirement age.  The US type is different and more fluid, so to say.  It can change or the disability rating can change, as we all know.  But I can find nothing that clarifies how the disability compensation works.  I need something official with a letter from the VA or DoD or similar.  Does anyone know of such a website or document that can clarify how this maddening system works?

For the Germans, limited is seen as an income and is taxed, whereas life is non-taxed.  Our is basically a lifetime compensation, but it can change at any time through an examination. 

Any help on this would be greatly appreciated.

Cheers!

[pacmanx1]

2 hours ago, Scottish_Knight said:

I've had to hire a tax expert, and this has actually become work. 

The tax expert should be aware of this information.

Disability. If you're retired on disability, see Military and Government Disability Pensions under Sickness and Injury Benefits, later. Qualified reservist distribution (QRD). If you received a QRD of all or part of the balance in your health FSA because you're a reservist and you have been ordered or called to active duty for a period of 180 days or more, the QRD is treated as wages and is reportable on Form W-2. Veterans' benefits. Don’t include in your income any veterans' benefits paid under any law, regulation, or administrative practice administered by the Department of Veterans Affairs (VA). The following amounts paid to veterans, or their families aren't taxable. • Education, training, and subsistence allowances. • Disability compensation and pension payments for disabilities paid either to veterans or their families. • Grants for homes designed for wheelchair living. • Grants for motor vehicles for veterans who lost their sight or the use of their limbs. • Veterans' insurance proceeds and dividends paid either to veterans or their beneficiaries, including the proceeds of a veteran's endowment policy paid before death. • Interest on insurance dividends left on deposit with the VA. • Benefits under a dependent-care assistance program. • The death gratuity paid to a survivor of a member of the U.S. Armed Forces who died after September 10, 2001. • Payments made under the compensated work therapy program. • Any bonus payment by a state or political subdivision because of service in a combat zone.

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See Also

Military and Government Disability Pensions Certain military and government disability pensions aren't taxable. Service-connected disability. You may be able to exclude from income amounts you receive as a pension, annuity, or similar allowance for personal injury or sickness resulting from active service in one of the following government services. • The armed forces of any country. • The National Oceanic and Atmospheric Administration. • The Public Health Service. • The Foreign Service. Conditions for exclusion. Don’t include the disability payments in your income if any of the following conditions apply. 1. You were entitled to receive a disability payment before September 25, 1975. 2. You were a member of a listed government service or its reserve component or were under a binding written commitment to become a member, on September 24, 1975. 3. You receive the disability payments for a combat-related injury. This is a personal injury or sickness that: a. Results directly from armed conflict; b. Takes place while you're engaged in extra-hazardous service; c. Takes place under conditions simulating war, including training exercises such as maneuvers; or d. Is caused by an instrumentality of war. 4. You would be entitled to receive disability compensation from the VA if you filed an application for it. Your exclusion under this condition is equal to the amount you would be entitled to receive from the VA.

 

Pension based on years of service. If you receive a disability pension based on years of service, in most cases, you must include it in your income. However, if the pension qualifies for the exclusion for a service-connected disability (discussed earlier), don't include in income the part of your pension that you would have received if the pension had been based on a percentage of disability. You must include the rest of your pension in your income.

Retroactive VA determination. If you retire from the U.S. Armed Forces based on years of service and are later given a retroactive service-connected disability rating by the VA, your retirement pay for the retroactive period is excluded from income up to the amount of VA disability benefits you would have been entitled to receive. You can claim a refund of any tax paid on the excludable amount (subject to the statute of limitations) by filing an amended return on Form 1040-X for each previous year during the retroactive period. You must include with each Form 1040-X a copy of the official VA determination letter granting the retroactive benefit. The letter must show the amount withheld and the effective date of the benefit. Generally, the VA determination letter will contain a table with five headings. The table on the letter must cover the same dates for the tax year reported on the Form 1040-X. To calculate the correct tax reduction, multiply the Effective Months by the Amount Withheld for the tax year. For example, Form 1040-X filed for tax year 2018. The table shows the Amount Withheld effective December 2017 is $320.00. To calculate the amount for the tax reduction, multiply the 2018 Effective Months by the Amount Withheld. In this case, January–December (2018) is 12 months X $320.00 (Amount Withheld) = $3,840.00; this amount should be the amount claimed as a reduction on Line 1 Adjusted Gross Income (AGI), Column B of the 2018 Form 1040-X. If you receive a lump-sum disability severance payment and are later awarded VA disability benefits, exclude 100% of the severance benefit from your income. However, you must include in your income any lump-sum readjustment or other non-disability severance payment you received on release from active duty, even if you're later given a retroactive disability rating by the VA

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2021 Publication 525 (irs.gov)

 

 

[pacmanx1]

 

Don’t want to steer you wrong

You can probably contact the VA 1 (800) 827-1000 and ask them for any publication(s) and the same with the IRS 1 (800) 829-1040.

 

Edited September 19, 2022 by pacmanx1

[Scottish_Knight]

@pacmanx1, helpful information mate.  Truly.  However, my tax advisor is German.... hence I live in Germany.  This is unknown to them here.  The German tax office give not one F over the IRS.  The Germans feel if my disability is permanent (of which none are) then it's considered lifetime and not taxed.  They then believe that since my disabilities are not permanent, then it's considered limited and turned off when I am 63 (retirement age here), which is not the case.  Hence it's taxable.  A right pain sometimes here.

VA disability compensation is more...well, fluid.  It can change.  Increase or decrease and could be for life and could reach 0% in a years time.  Trying to explain this is not going well.  

[pacmanx1]

As stated in my second post not trying to steer you the wrong way, you can let your tax adviser and the German tax office read over this information and see what will happen and take it from there and if they still don't understand you can contact the VA if they, the tax advisor and or the German tax office need something more specific you could contact the VA for a more specific letter explaining your retro payment.  There are times when the veteran can contact the VA and ask for a separate specific generated letter that the VA could write and or supply to explain their benefits.   

[blahsaysme2u]

no input other than to say this is bonkers...sorry you are dealing with this bud...keep us posted on how this turns out or if you make any headway on clearing up the tax law with germany and SC that is not P&T. im following for updates

[Scottish_Knight]

Well this was odd indeed.  I wrote what I felt was a good explanation of VA disability compensation and added words in order to define it in comparison to the German system.  My tax advisor read it and felt it would suffice the German tax office.  I then contacted the VA by phone.  This time I was informed that the VA had no letter to support my situation.  I informed the woman at the VA what I wrote and read it to her.  She found it well written and offered to send me a blank VA document per email with the VA letter head and suggested I merely 'cut and paste'.  How odd is that!  I did so, and off it went last week.  It will take a few weeks before I hear back.  But I still find this unusual from the VA.  Cut and paste?  Truly?

Cheers!