Hi and welcome to Just Answer!
Military retired pay is subject to Federal taxes. If your retirement pay is based on age or length of service, it is taxable and must be included in your income as a pension on lines 16a and 16b of Form 1040 or on lines 12a and 12b of Form 1040A.
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. 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, 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.
The fact of being disabled by itself doesn't exclude your military retirement pay from taxable income.However if you receive military disability pensions - that is not taxable. IRS Reg 1.122 - http://edocket.access.gpo.gov/cfr_2010/aprqtr/pdf/26cfr1.122-1.pdf provides conditions under which military disability pensions are excluded from taxable income.For instance benefits based on a service-connected disability, VA benefits are not taxable.
Specifically for your issue - please clarify - are you receiving disability benefits form VA?
Which reporting form did you receive that reports these benefits? Is that 1099R? If so - please verify amounts reported in each box?
Hello and thank you for using Just Answer,As a tax professional I worked by Parris Island,Ft Benning, and Hunter Army Airbase so I have dealt with this numerous times.Your situation depends on a couple of items. First when your determination was made for disability (VA determination date more important than next) and second when the payment was made to you.
If the VA determination date was retroactive to the severance payment then this issue falls under the "St Clair Letter". Many times a service member is discharged for medical but the disability determination letter is not given till later (sometimes years). If the determination letter makes the determination retroactive, the service member goes back and files amended returns for the year(s) of previous payments that were taxable but now are not.
The 1040x is used only for a previous return that was filed and showed taxable income if the determination is just made later in the year and the tax return has not been filed yet then the correction is shown on the original return. Now a days the payment office is better at making the change quicker and the W2 correctly reflects the amount that is taxable.
Let's assume that the payment was made retroactive to a past year. A 1040X is filed with a copy of the determination letter showing the retroactive date, a copy of the calculations used to determine how much is really taxable, a copy of the original W2, and a statement citing St Clair vs US (this relates back to a service member by that name that went to tax court to be able to recoup taxes paid after the timeframe for the same).
If you have a problem with this yourself then you need to use a tax professional (you can go back where you went before but tell them you want someone that is familar with the St Clair for military). (They should know that the amount that is not taxable goes on Line 21 as a negative.)
Now all this is not used if the payment is not covered by a retroactive date on the VA. DFAS will most probably not issue you a corrected W2. I have heard of some getting one but......
You listed Texas as your state, but if you were in another state and had to pay tax on that income then wait until federal is complete and then deal with state.
Please just respond to me (DO NOT RATE) if I have misunderstood your situation or you want to add more info. I will continue to work with you no matter what, but a poor rating only reflects badly on me and does not address the situation.
The only thing I can think of is the date on the VA determination letter. It must make the disability retroactive or you are not entitled to a refund. If the VA determination letter does not go back to before Dec ?,2011 then you will not get the refund. Look at the determination letter carefully. Also the % for disability, to get it all back the % would need to be 100% and the date to a day before the payment date, then you would be entitled to the full refund of the withholding.
Check to make sure the VA determination letter shows a retroactive date, check the percentages, and then if all is right don't give up. Go back to the office you went to and sit down with a preparer to go over all this. If the percentage is not 100%% it is very important to send a copy of the calculations used to show the how the nontaxable amount was determined. You can resubmit the 1040X (if the date is retroactive). The professional should also write a statement on your behalf, spelling out in simple detail all the specifics and request to know on what grounds the IRS is denying you the refund. Not just that the military reported it as taxable, but why now with the VA determination with a retroactive date, they would deny the process spelled out in the ST Clair decision.
I told you I worked outside the gates of Marine Posts and Army Bases. I can not tell you how many of these I have dealt with.
Do not give up if you have the right to the refund, but I cannot stress enough how important the retroactive date is, without that in the VA Determination you are finished.