Combat-Injured Veterans Tax Fairness Act of 2016 (H.R.5015)

If you’re a soldier wounded in combat and your wounds are severe enough that you can no longer serve in the military, you could be entitled to a lump-sum severance payment from the Department of Defense.

Of those veterans who received this check through 2016, when it came time to cash it, the tax man said they owed something for having received it, and a substantial amount of their disability severance pay was withheld for taxes.

As of December 16, 2016, this travesty was addressed, somewhat, by the passage of the Combat-Injured Veterans Tax Fairness Act of 2016 (H.R.5015).

The passage of this legislation recognizes retroactively, back through January 17, 1991, that such payments comprise disability pay and not income, and therefore allows for any veteran who was taxed on such payment received to recover the amount paid in taxes.

It mandates that, by December 16, 2017, each veteran be provided with:

1)      Notice of the amount of improperly withheld severance payments, and

2)      Instructions for filing amended tax returns to facilitate recovery thereof.

Of course, thousands of veterans have yet to receive any notice or instructions, but the law remains the same.

There are two ways to recover the amount. The first, should there be adequate records to do so, would be to submit a claim or an amended tax return based on the actual amount of severance received.

The second method is to use a simplified method providing a flat fee depending on the year in which the payment was received. That schedule is as follows:

For tax years 1995-2005, $1,750
For tax years 2006-2010, $2,400
For tax years 2011-2016, $3,200

The actual amount, however, could be much more than the simplified method, so it’s imperative that veterans contact a tax professional to secure tax transcripts and any other data regarding the year in question so as to file the most accurate and beneficial claim possible.

There is a time limit however, as veterans who receive such notice have three years from the date thereof to file their claim.

On a related note, the Tax Cuts and Jobs Act also extended combat zone treatment to Egypt’s Sinai Peninsula for service on or after June 9, 2015. Benefits of combat zone treatment include exclusion of combat pay from gross income, no withholding on excludable wages, extra time to file tax returns, appeals, or petitions, and a host of other benefits.

For more information about the Combat-Injured Veterans Tax Fairness Act, extended combat zone treatment, or for more specific instructions on filing claims to claim refunds for returns already filed previously, please e-mail me at fmachado@soapaccounting.com for a free consultation in person, online, or over the phone.

Sources:
https://www.congress.gov/bill/114th-congress/house-bill/5015 (text of the CIVTF Act of 2016)

https://www.irs.gov/individuals/military/combat-injured-veterans-tax-fairness-act-claim-information-available (IRS instructions on how to file amended returns to claim refund)

https://www.dfas.mil/dsp_irs (official notice and notes on how to file a claim)