Hello,
Please see: The attached excerpt from
LINK <----
The DoD Financial Regulation provides taxability information in consideration of IRS policies. Note: I am not an attorney nor a federal tax expert.
As you probably know, the DoD provides a rating for ONLY the disabilities that make the person unfit for continued service. The VA rates ALL service-connected disabilities.
The ratings by the VA do not impact the taxability (if any) of the DoD ratings EXCEPT as discussed below.
Reference: DoD 7000.14-R Financial Management Regulation Volume 7B, Chapter 24
* August 2023----
2.0 GROSS RETIRED PAY AND FITW
2.1 Subject to FITW
Retired pay is income and constitutes wages subject to FITW, except as otherwise indicated in this chapter. See Title 26 of the Code of Federal Regulations, section 31.3401(a)-1(b) (26 CFR 31.3401(a)-1(b)) for more information on collection of income tax at the source.
2.2 Not Subject to FITW
The gross retired pay of a member may not be subject to FITW if the member is on the Temporary Disability Retired List (TDRL) or Permanent Disability Retired List (PDRL), receiving disability retired pay and if:
2.2.1. On or before September 24, 1975, the member was entitled to receive retired pay computed on the basis of percentage of disability in accordance with 26 U.S.C. § 104(a)(4) and 26 U.S.C. § 104(b)(2)(A);\
2.2.2. On September 24, 1975, he or she was a member of the Armed Forces (or Reserve Component thereof) or under a binding written commitment to become such a member (26 U.S.C. §§ 104(a)(4) and 104(b)(2)(B));
2.2.3. The member is receiving disability retired pay because of a combat-related injury. The term “combat-related injury” means personal injury or sickness incurred as a direct result of armed conflict, or while engaged in extra hazardous service, or under conditions simulating war, or caused by an instrument of war. See 26 U.S.C. §§ 104(a)(4) and 104(b)(2)(C). The applicable Service makes the determination at the time of discharge. See DoD Instruction (DoDI) 1332.18, Disability Evaluation System (DES); or
Note: The amount of disability retired pay described in subparagraph 2.2.3 not subject to FITW is the amount related to the combat-related injury, but in no circumstances, will the nontaxable amount be less than the amount the member would be entitled to receive from the Department of Veterans Affairs (VA) for that injury.
2.2.4. The member would be entitled to disability compensation from the VA. See 26 U.S.C. §§ 104(a)(4) and 104(b)(2)(D). For those members who have waived all or a portion of retired pay in order to receive disability compensation from the VA, subtract the amount of retired pay waived from the gross retired pay to compute the member’s taxable income. Subtract the waived retired pay amount prior to subtracting other income reducing amounts, such as Survivor Benefit Plan (SBP) premiums. For members who receive retired pay computed based upon years of service and have a portion of retired pay that is tax exempt due to their retirement for disability under 10 U.S.C., Chapter 61, taxable pay is determined by reducing the gross retired pay by either the VA disability compensation entitlement or by the retired pay that would be exempt due to the percentage of disability, whichever is greater.
3.0 DISABILITY COMPENSATION NOT SUBJECT TO FITW
A member is entitled to exclude the disability compensation, additional amount, and retroactive disability compensation from the taxable portion of retired pay. In order to exclude retroactive amounts, a member must follow applicable Internal Revenue Service (IRS) procedures. Amended 1099-Rs are not provided for the retroactive period.
3.1 Disability Compensation
Disability compensation is the maximum amount that a member would be entitled to receive upon application to the VA.
3.2 Additional Amount
An additional amount is the difference between a prospective VA disability compensation award and the amount excluded under section 2.0.\
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Ron
