Retired pay, like other income, is subject to Federal income taxation unless wholly or partially exempted by statute. The Defense Finance and Accounting Service in Cleveland (DFAS-CL) computes the amount to be withheld from retired pay and withholds this amount. Every year, no later than the 25th of January, DFAS-CL will send you an Internal Revenue Service (IRS) Form 1099-R which will show all the taxable retired pay paid and the amount of tax withheld during the calendar year.
If retirement is for disability, and all retired pay is tax-free, a IRS Form 1099-R will not be issued. Retirees are not required to report this tax-free income.Some retirees retired for disability are entitled to claim a sick pay exclusion from their retired pay. The IRS Form 1099-R will not reflect any sick pay exclusion. Individuals must claim the sick pay exclusion themselves on the appropriate line of IRS Form 1040, the "long" form of the U.S. Individual Income Tax Return.
If a retiree is not a citizen of the United States and does not reside in the United States, IRS Form 1099-R will not be furnished. Nonresident alien tax will be withheld from a retiree's retired pay instead, and he or she will be informed by TDF Form 1042S at the end of each calendar year as to the amount withheld.
Taxable income from retired pay does not include the amount of SBP deductions. Participants are taxed only on what they actually receive. For example, if a retiree's non-disability retired pay is $6,000 a year and is reduced by $700 for SBP, only the reduced retired pay of $5,300 need be included as taxable income on the Federal income tax return. The SBP payable to the designated beneficiary is subject to Federal income tax, but is not subject to Federal estate tax.
For further details on SBP tax questions, retirees should consult a legal assistance attorney, a tax counsel, an official of the Internal Revenue Service, or State tax authorities.
Further Information: Determinations in each individual tax case are made by the Internal Revenue Service or the tax authorities of the State government concerned. Answers to Federal tax questions may be obtained from the District Director of Internal Revenue Service. Answers to state tax questions may be obtained from appropriate State officials.
Tax Information on the Internet: Federal Income Tax information is available at www.irs.gov.