Ah, January. A fresh start and a time to start thinking about filing your taxes. What could be better? If you are a recently retired military veteran you have some extra things to think about when it comes to your taxes. It involves retro-active VA Disability Compensation, your retired pay and something called the Strickland Decision. Let me explain.
First of all, based on current case loads at the VA you won’t (or didn’t) receive your VA Disability Compensation immediately after your retirement. So you will receive retro-active VA Compensation (at least I haven’t found anyone who didn’t in the last 5 years).
Once you do get a VA Disability Rating and the associated compensation your military retired pay will be adjusted…down. That is because VA Disability Compensation is offset with a reduction in your retired pay. If you are less than 50% disabled, the offset is dollar for dollar. If you more than 50% disabled the offset is much less (and in fact will go away in 2014). From the date of your rating forward your pay (and resulting taxes) will be right. But…
No one will ever go back and adjust your retired pay for the period you were waiting for your disability rating. So your 1099-R (the form where your retired pay is reported) will have an income that is too high and you’ll pay more taxes than you really owe.
A Vietnam era retired military member challenged this in court and won. In the Strickland Decision the court said that retired military members can reduce their military retired pay by the amount that should have taken out as a VA offset.
Take a look at your own situation and consult with your tax professional to see if you should adjust your current year tax return or previous year returns (generally limited to 3 years).