Combat Injured Veterans Frequently Asked Questions: The Department of Defense just sent me a notice indicating that my disability severance payment was originally reported as taxable income and that I may file a claim to exclude the payment as income because I later became entitled to receive disability compensation from the Department of Veterans Affairs. Is this a legitimate letter and what are my next steps? Yes, the Combat-Injured Veterans Tax Fairness Act of 2016 directed the Secretary of Defense to identify disability severance payments paid after January 17, 1991, that were included as taxable income on Form W-2, Wage and Tax Statement, but were later determined to be nontaxable and to provide notice of the amount of that payment. Follow the instructions in the notice to file IRS Form 1040-X, Amended U.S. Individual Income Tax Return, to file a claim for credit or refund. Be sure to include a copy of the notice with Form 1040-X. The Department of Defense sent a notice to the estate of a veteran who’s now deceased indicating that the disability severance payment was originally reported as taxable income and that the estate may file a claim to exclude the payment as income because the decedent later became entitled to receive disability compensation from the Department of Veterans Affairs. Is this a legitimate letter and what are the estate’s next steps? Yes, the Combat-Injured Veterans Tax Fairness Act of 2016 directed the Secretary of Defense to identify disability severance payments paid after January 17, 1991, that were included as taxable income on Form W-2, Wage and Tax Statement, but were later determined to be nontaxable and to provide notice of the amount of that payment. Follow the instructions in the notice to file IRS Form 1040-X, Amended U.S. Individual Income Tax Return, to file a claim for credit or refund. Be sure to include a copy of the notice as well as a completed IRS Form 1310, Statement of Person Claiming Refund Due a Deceased Taxpayer, with Form 1040X.- Note: You do not have to submit a Form 1310 if you are the surviving spouse of the service member and filed a joint tax return with the service member for the year the disability severance payment was made. See Publication 3, Armed Forces Tax Guide PDF, for additional information and instructions. My disability severance pay was reported on a W-2 as taxable income. I included it in my taxable income but have not received a notice from the Department of Defense to inform me of how to correct this error. How do I claim my credit or refund? File IRS Form 1040-X, Amended U.S. Individual Income Tax Return, for the year the disability severance payment was made. Include both of the following: A copy of documentation showing the exact amount of and reason for your disability severance payment, such as a letter from the Defense Finance and Accounting Services (DFAS) explaining the severance payment at the time of the payment or a Form DD 214, and A copy of either the VA determination letter confirming your disability or a determination that your injury or sickness was either incurred as a direct result of armed conflict, while in extra-hazardous service, or in simulated war exercises, or was caused by an instrumentality of war. How do I get the documentation proof needed for my claim for credit or refund if I don’t currently have it? Veterans who do not have the required documentation showing the exact amount of and reason for your disability severance payment and did not receive the notice mailed by the Department of Defense in July 2018, July 2019, or September 2022, will need to contact the National Archives National Personnel Records Center, or the Department of Veterans Affairs to obtain the necessary proof. I've been told that I need to submit a Form 1040-X to claim my credit or refund because my disability severance payment was initially reported as taxable income. Do I need a copy of my original return to file? You don’t need your original return if you have the information for that tax year. If you do not have the information to complete the Form 1040X, you can request a transcript online at IRS.gov/transcript. If you are unable to get the transcript online you can call 833-558-5245 ext 378 between 7 a.m. and 7 p.m. (Alaska and Hawaii follow Pacific time). Do I have options on how to claim my tax refund? There are two options for claiming your tax refund if the disability severance payment was paid after January 17, 1991, and before January 1, 2017. You can: Claiming a standard refund amount is the easiest way to request a refund because it doesn’t require you to find your original tax return or ask the IRS for information from the return. This may be larger or smaller than the refund based on the actual amount from your return. File a claim based on the actual amount of the overpayment attributable to your lump sum disability severance payment, or Choose to claim the standard refund amount listed below that corresponds to the year the disability severance payment was made. Simply write “Disability Severance Payment” on Form 1040X, line 15, and enter the standard refund amount listed below on line 15, column B, and on line 22, leaving the remaining lines blank. $1,750 for tax years 1991-2005 $2,400 for tax years 2006-2010 $3,200 for tax years 2011-2016 May I claim this standard amount even if I already excluded my disability severance payment from my income? Yes, you may claim the standard amount even if you already filed Form 1040-X to claim a refund based on the actual amount of the overpayment attributable to the disability severance payment. But, you must reverse your prior claim by reporting the amount of the disability severance payment as a positive number on line 1 in column B. Then, enter the standard refund amount on line 15, column B, as described in the previous question as you complete the rest of Form 1040-X. May I claim a refund based on the actual amount of my disability severance payment if I already claimed the standard amount? Yes, you may claim a refund based on the actual amount of the overpayment attributable to the disability severance payment even if you already filed Form 1040X to claim the standard amount. But, you must reverse your prior claim by reporting the standard refund amount on line 15, column B, as a negative amount as you complete the rest of Form 1040-X. What is the timeline for filing a claim? You must complete and mail an IRS Form 1040-X, Amended U.S. Individual Income Tax Return, for the tax year the disability severance payment was made generally by the later of: 1 year from the date of the Department of Defense notice, or 3 years after the due date for filing the original return for the year the disability severance payment was made, or 2 years after tax was paid for the year the disability severance payment was made. Where do I mail the claim? Enter “Veteran Disability Severance” or “St. Clair Claim” across the top of the front page of Form 1040-X, page 1. Send the completed Form 1040X and attachments to the following address, regardless of where you live: Internal Revenue Service 333 W. Pershing Street, Stop 6503, P5 Kansas City, MO 64108 Is there an IRS telephone number available? If you have questions about claiming a tax refund for your disability severance payment, you can call the IRS toll free at 833-558-5245 ext. 378 between 7 a.m. and 7 p.m. (Alaska and Hawaii follow Pacific time). Can I use the Where's My Amended Return tool to track the status of my amended return? Yes, but only if the disability severance payment was made in 2014 or later. Where’s My Amended Return? only tracks a claim for the current year and up to three prior years. Amended return processing can take up to 16 weeks to complete. Will I have to pay taxes on the refund paid from this claim? You will not have to pay taxes on the refund you claim on Form 1040-X. However, the IRS will figure any interest and include it in your refund. You must report this interest as taxable income for the year the refund is paid. You will receive a Form 1099-INT, Interest Income, that reports the amount of the interest. The IRS will mail Form 1099-INT in the year after the refund is paid. The IRS is required by law to issue a Form 1099-INT when interest is included in a tax refund.
