Veterans who are owed refunds for overpayments attributable to disability severance payments need to consult their tax advisor to file amended returns and claim their tax refunds before time runs out.
Veterans who received disability severance payments after January 17th 1991 and before January 1st 2017 and included that payment as part of their taxable income should file Form 1040X, Amended U.S. Individual Income Tax Return, to claim a credit or refund of the overpayment attributable to the disability severance payment.
The Internal Revenue Service is reminding veterans that time may be running out to claim their refund. Veterans should take action soon if they received a notice (letters 6060-A and 6060-D) and have not already filed to claim a refund or credit of the overpayment attributable to the disability severance payment.
The letter will have information on how to claim the tax refunds to which they are entitled. It also covers a simplified method for making the claim. Note, though, that this doesn’t mean you’ll get back an amount equal to the disability payment.
Any refund or credit you’re due will be based on each veteran’s individual tax circumstances for the year of the erroneously taxed payments. This includes any other income received and tax payments you made in the year your disability amount was paid.
If the vets paid too much tax almost three decades ago, why are they just now being told of the mistake?
The reason is the enactment of the Combat-Injured Veterans Tax Fairness Act in 2016. Federal law prohibits taxation of one-time lump sum disability severance payments made to veterans who suffer combat-related injuries.
The Department of Defense (DoD), however, improperly withheld taxes on these payments from thousands of veterans, many of whom did not realized their payments were improperly reduced by the taxes. In other instances, affected vets reported the payments as income.
In most cases, the Internal Revenue Service accepts amended returns only within three years of the original tax filing.
However, the Combat-Injured Veterans Tax Fairness Act grants these taxpayers an alternative timeframe. They can correct their earlier filings within one year from the date they receive a letter from the Department of Defense notifying of their potential tax overpayment on disability benefits.
Veterans who did not receive the notice from the DoD and received a disability severance payment that was reported as taxable income could still file a claim by including the necessary documentation to file with their Form 1040X. The IRS advises these veterans to contact the National Archives, National Personnel Records Center, or the Department of Veterans Affairs to obtain the required documentation.
If you or a loved one is a veteran who thinks you might have a tax refund coming from a disability severance payment, please contact your Missouri tax advisor at Schultz, Wood, & Rapp.