The Combat-Injured Veterans Tax Fairness Act of 2016, enacted December 2016, allows certain veterans who received lump sum disability severance payments additional time to file a claim for credit or refund of an overpayment attributable to the disability severance payment. The law 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. The Department of Defense mailed letters to affected veterans (letters 6060-A and 6060-D) in July 2018 and July 2019.
What this means for some veterans
Veterans discharged from military service due to medical disability may receive a one-time lump sum severance payment. Disability severance pay is taxable income unless the pay results from a combat-related injury or the service member receives official notification from the Department of Veterans Affairs (VA) approving entitlement to disability compensation.
Anyone who received a disability severance payment that was taxed and determines later that the payment qualifies under one of the rules above can file a claim for credit or refund for the tax year in which the disability severance payment was made and was included as income on a tax return.
For veterans who received a lump sum disability severance payment after January 17, 1991, the Combat-Injured Veterans Tax Fairness Act of 2016 may provide additional time to claim a credit or refund for the overpayment attributable to the disability severance payment.
What you need to do
You must complete and file IRS Form 1040X, Amended U.S. Individual Income Tax Return, for the tax year the disability severance payment was made carefully following the instructions in the notice mailed by the Department of Defense in July 2018 or July 2019. You must mail the claim 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.
If you did not receive the notice from the Department of Defense and you received a disability severance payment after January 17, 1991, that you reported as taxable income, you can still file a claim as long as you attach the necessary documentation to your Form 1040X. You may contact the National Archives, National Personnel Records Center, or the Department of Veterans Affairs to obtain your documentation for submission with the required Form 1040X. Note: IRS is required by law to issue a Form 1099-INT for the year the refund was issued. See the FAQs for additional information.