Dfas Military W-2 Includes Disability

[JAinNC]

Client has 2007 W-2 from Navy. Was discharged in Nov 2007 and tells me his partial "disability severance Pay" is not taxable because they started his disability at the same time he was discharged - which he says is a pilot program in San Diego.

He has a sheet titled "Tax Certificate" "For Disability Severance Payment Only"
From Personnel support detachment Naval Station San Diego
1. The subject member was pd disability severance pay and federal income tax was w/h from the monie pd.
2. The following breakdown applies
Disability Severance pay amount = 49393.80
Fed income tax w/h = 12348.45
State income tax pd = 0
Total pd after taxes = 37045.35
3. This certificate is to be used for income tax filing purposes only.

(It is signed by Military Pay Supervisor)

The above is included in Box 1 with his regular pay and box 2 with regular federal withholding. The amount is not included in SS or Med wages.

If as he says, this is excluded from taxable income (because he is also already drawing VA disability) and the VA will repay the Dept of Def back this over time.
He was told to not prepare his own taxes but to go to a "Competent Preparer"
I have not run into this.
With no adjustment he will get a federal refund - but he says all that extra withholding is suppose to be coming back to him.

North Carolina will exclude up to 35000 for severance pay without the federal adjustment he says he should get.

I need help.
Thanks,
Jeannie

[Koss]

Exclusion

The following text is from IRS Publication 525, Taxable and Nontaxable Income. The discussion begins on page 17.

The last three or four paragraphs of the discussion are probably applicable to your client. But you may need to get more information.

If the income can be excluded, you may need to simply back it out with a negative entry on line 21 of Form 1040. Label it "Excluded Disablity Severance Payment."

I can't find any guidance on how to exclude it.

Military and Government Disability Pensions

Certain military and government disability pensions are not 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.

(i) The armed forces of any country.

(ii) The National Oceanic and Atmospheric Administration.

(iii) The Public Health Service.

(iv) The Foreign Service.


Conditions for exclusion. Do not 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:

Results directly from armed conflict,

Takes place while you are engaged in extra-hazardous service,

Takes place under conditions simulating war, including training exercises such as maneuvers, or

Is caused by an instrumentality of war.

4. You would be entitled to receive disability compensation from the Department of Veterans Affairs (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, you generally must include it in your income. However, if the pension qualifies for the exclusion for a service-connected disability (discussed earlier), do not 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 armed services 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 1040X for each previous year during the retroactive period.

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 nondisability severance payment you received on release from active duty, even if you are later given a retroactive disability rating by the VA.

[JAinNC]

Thank you so much

I found the same info after I posted my question. Why would they withhold all the extra federal tax on the non-taxable amount? I will talk to him again and see if has a breakdown of the acual disability and back severance pay.

If any others have any info on this please post.
Jeannie

[Koss]

I found the same info after I posted my question. Why would they withhold all the extra federal tax on the non-taxable amount? I will talk to him again and see if has a breakdown of the acual disability and back severance pay.

If any others have any info on this please post.
Jeannie

Because for some folks it's taxable, and for some it isn't. Looking again at the discussion from Pub. 525, the key word is retroactive.

A guy could retire in January, 2007, and receive his disability severance pay in the middle of February, 2007. Then he submits his application to the VA. With the incredibly efficient health care system operated by the VA, they might award him VA disability benefits in March 2008, and then make it retroactive. In this particular scenario, if he hasn't yet filed his 2007 return, the retroactive determination by the VA makes the severance payment nontaxable.

But if the VA has not yet made a determination, or if he hasn't even submitted an application for benefits yet, then it's fully taxable.

And the payroll office at DFAS has no idea what the status is when they issue the check and the Form W-2.

If you actually think that the Department of Defense communicates with the Department of Veterans' Affairs, you're dreaming. They may send some data back and forth occasionally, but that's not communication. LMAO

To reach for a much more concrete analogy...

Think of it as a Form 1099-R that has the box checked for "taxable amount not determined."

Good luck.