Severance Pay Taxes Incorrectly Withheld Must Now Be Refunded

Are you a service-disabled veteran who was discharged by the military due to disability or injury? Did you get severance pay from the military when you were discharged? If so, you may be entitled to money from the IRS.

By law disability compensation, be it from the DOD or VA is tax-free. Since 1991, the DOD has been incorrectly withholding taxes from disability severance payments of veterans who suffered service-ending combat disabilities, it literally took an act of Congress to fix this error. The “Combat-Injured Veterans Tax Fairness Act of 2016”, which was part of the year-end frenzy of laws to get passed and signed, provides refunds of the incorrectly withheld taxes for approximately 14,000 veterans.

The DOD has one year to notify affected veterans or their survivors of how much money was wrongly withheld from the severance pay, and it must provide instructions on how to file an amended tax return to receive a refund. The normal IRS statute of limitations is waived for affected people.

The law also tells the DOD to make sure they don't incorrectly withhold taxes from severance pay in the future, and the DOD must also report to Congress on how many people were affected, how much money was involved (some reports say as much as $80 million was incorrectly withheld from veterans), and how DOD will keep this from happening again.