• Special Items of Interest
• Income Tax Withholding
• Social Security Tax (FICA)
• Tax Computation (For 2000 Taxable Income)
• Survivor Benefit Tax Treatment
• Waiver of Retired Pay
• Who Must File a Federal Income Tax Return
• Gross Income to Be Reported
• Deductions and Exclusions

Retirement pay received from the Government by Uniformed Services members is not exempt from federal income taxes. Disability retirement pay that is computed on the basis of the percentage of disability may be excludable from gross income, but disability retirement pay that is computed based on years of service is excludable only to the extent allowed under the percentage of disability method (See Disability Retirement).

Veterans benefits under any law administered by the VA are not includible in income. This includes amounts paid to veterans or their families in the form of educational, training, or subsistence allowances, disability compensation and pension payments for disabilities, grants for homes designed for wheelchair living, grants for motor vehicles, and veterans pensions.

Dividends and proceeds from maturing Government insurance contracts under the NSLI and all other acts relating to veterans are exempt. Interest on dividends left on deposit with the VA is exempt. If an individual uses accumulated dividends to buy additional NSLI, neither the dividends nor the paid up insurance is taxable.

Qualified Military Benefits. Before enactment of the Tax Reform Act of 1986, a variety of benefits for military personnel were excluded from gross income under a variety of statutes, regulations, and administrative practices. In the 1986 Act, it was determined that, in the future, no such exclusions would be permitted except under some provision of the IRS Code. However, the Act added to the Code a provision that, in effect, “grandfathered” all the previous non-Code exclusions. Under this provision, all such exclusions that were in effect on September 9, 1986, continue to be in effect. If a benefit in effect on that date is thereafter modified or adjusted for increases in the cost-of-living or the like, the adjustments are also excludable.

Disability Retirement. Effective January 1, 1977, the federal tax exemption for military disability retirement pay was largely abolished. Members who receive military disability retirement pay for combat-related disabilities will continue to receive the federal tax exemption as will members who were receiving military disability payments prior to September 25, 1975 or who were on active duty or were a member of a Reserve Component prior to September 25, 1975. Combat-related disability means personal injury or sickness incurred as a direct result of armed conflict, or while engaged in extra hazardous service, or under conditions simulating war or an instrumentality of war. The manner in which the retired pay is computed determines whether any of the pay is subject to federal income tax. If a member is receiving retired pay computed by multiplying the percentage of disability times basic pay, all retired pay will be exempt from federal taxation. If a member is retired for disability and chooses to have his or her pay computed on the basis of length of service, then the amount of his or her retired pay which is in excess of the amount he or she would have received if he or she had elected to have his or her pay computed on the basis of his or her percentage of disability is not excluded and is reported on IRS Form 1099R as taxable income.

VA Disability Compensation or Pension. Payment received from the VA for disability compensation or pension is tax exempt. Entitlement to the payment will not necessarily result in a tax saving unless a waiver of equivalent retired pay has been executed. Disability compensation from the VA may include an additional amount payable on behalf of dependents for veterans with a disability rating of 30 percent or higher. Military retirees who do not receive their disability benefits from the VA may exclude an amount equivalent to the VA benefits to which they are entitled. The percentage of degree of disability awarded by the VA does not exempt the same percentage of military retired pay from taxes as a military disability rating. A military disability rating of 50 percent would exclude 50 percent of the military retired pay. A 50 percent VA disability rating would provide an amount established annually for VA compensation. Former prisoners of war may be entitled to VA disability pay for disabilities incurred while prisoners. Former POW’s should get a thorough VA physical examination upon retiring.

When writing to the Internal Revenue Service for information concerning your return, always provide them with your Social Security number and direct your inquiry to the IRS Service center where the return is filed.

Much of this information has been provided by the Uniformed Services Almanac.™
Click here to learn how to obtain a copy.