Key Tax Developments Affecting Retirees
Social Security Tax Developments
Social Security Disability for Combat-Related Injuries May Be Partly Taxable. – The
nontaxable percentage of a retiree's social security benefits is based on the overall level of the
retiree's income. A disabled veteran may not avoid tax on the remainder of the benefits by trying
to rely on the rule that disability payments for combat-related injuries are generally nontaxable.
(Reimels v. Commissioner, 123 T.C. No. 13 (2004).) See Chapter 11 of the treatise for an
explanation of nontaxable combat disability pay. See Chapter 16 for an explanation of the
nontaxable portion of social security benefits.
IRS May Levy on Social Security Benefits. – Although social security benefits are generally not
subject to execution, levy, attachment, garnishment, bankruptcy or insolvency laws, etc., the IRS
may nevertheless levy on social security benefits for recovery of unpaid taxes. A single levy may
attach the retiree’s right to receive all future social security payments. (Acevedo v. United States,
___ F. Supp.2d ___ (E.D. Mo. 2008); Ltr. Rul. 200909037.) See Chapter 15 of the treatise for a
discussion of the taxation of social security benefits.
Estate Tax on Retirement Benefits
Combining Income Tax Deferral with QTIP Treatment. – If a retirement plan or IRA distributes
a lump sum to a QTIP trust upon a retiree’s death, the excess of the lump sum over the retiree’s
investment will immediately become subject to income tax. However, it may be possible to enjoy
income tax deferral, while retaining QTIP treatment, by paying the benefits as an annuity or in
installments. Note also that, with proper structuring, both income tax deferral and QTIP
treatment may be available for installment payments to a trust from a nonqualified plan. (Rev.
Rul. 2006-26, 2006-1 C.B. 939, Ltr. Rul. 9040029. See Chapter 18 of the treatise for a
discussion of the estate tax treatment of retirement benefits.
U.S. Military and Survivor Benefits
Statute of Limitations Extended for Tax Refunds Triggered by VA Awards. – A retroactive
nontaxable award of disability benefits by the Department of Veterans Affairs (the “VA”) may
replace military retired pay that was subject to tax in prior years. If so, the law extends the statute
of limitations for recovery of the prior year taxes until the end of the one-year period beginning on
the later of the date of the VA’s determination or June 17, 2008. However, the extension does not
apply to tax years beginning more than five years before the date of the VA determination, or
beginning before January 1, 2001. (I.R.C. § 6511(d)(8), added by Heroes Earnings Assistance
and Relief Tax Act of 2008.) See Chapter 12 of the treatise for a discussion of the taxation of
military pay and VA benefits.
Recovery of Prior Year Withholding Taxes After Retroactive Award of VA Benefits. – A
retiree may be able to recover taxes withheld in prior years on military retired pay that
subsequently offsets a retroactive award of nontaxable VA benefits, even if the statute of
limitations has run for those prior years. (Vercher v. United States, ___ F. Supp. ___ (W.D. La.
August 22, 2007).) See Chapter 12 of the treatise for a discussion of the taxation of military pay
and VA benefits.
Surviving Spouse Tax Refund on Retroactive Grant of Veterans Benefits. – Disability benefits
paid by the Department of Veterans Affairs are nontaxable even if paid to a veteran’s surviving
spouse. Unfortunately, though, the Government will use the amounts of the VA disability
payments to reduce payments to the surviving spouse under the military’s Survivor Benefit Plan
(SBP). However, if the Government should retroactively replace SBP benefits with VA benefits, a
surviving spouse may obtain a refund of tax previously paid on the SBP benefits – provided the
statute of limitations has not run on the years the spouse paid the tax. Ebert v. United States, __
Fed. Cl. __ (2005). See Chapter 12 of the treatise for an explanation of the taxation of U.S.
Military and survivor benefits.
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Social Security Disability for Combat-Related Injuries May Be Partly Taxable. – The
nontaxable percentage of a retiree's social security benefits is based on the overall level of the
retiree's income. A disabled veteran may not avoid tax on the remainder of the benefits by trying
to rely on the rule that disability payments for combat-related injuries are generally nontaxable.
(Reimels v. Commissioner, 123 T.C. No. 13 (2004).) See Chapter 11 of the treatise for an
explanation of nontaxable combat disability pay. See Chapter 16 for an explanation of the
nontaxable portion of social security benefits.
IRS May Levy on Social Security Benefits. – Although social security benefits are generally not
subject to execution, levy, attachment, garnishment, bankruptcy or insolvency laws, etc., the IRS
may nevertheless levy on social security benefits for recovery of unpaid taxes. A single levy may
attach the retiree’s right to receive all future social security payments. (Acevedo v. United States,
___ F. Supp.2d ___ (E.D. Mo. 2008); Ltr. Rul. 200909037.) See Chapter 15 of the treatise for a
discussion of the taxation of social security benefits.
Estate Tax on Retirement Benefits
Combining Income Tax Deferral with QTIP Treatment. – If a retirement plan or IRA distributes
a lump sum to a QTIP trust upon a retiree’s death, the excess of the lump sum over the retiree’s
investment will immediately become subject to income tax. However, it may be possible to enjoy
income tax deferral, while retaining QTIP treatment, by paying the benefits as an annuity or in
installments. Note also that, with proper structuring, both income tax deferral and QTIP
treatment may be available for installment payments to a trust from a nonqualified plan. (Rev.
Rul. 2006-26, 2006-1 C.B. 939, Ltr. Rul. 9040029. See Chapter 18 of the treatise for a
discussion of the estate tax treatment of retirement benefits.
U.S. Military and Survivor Benefits
Statute of Limitations Extended for Tax Refunds Triggered by VA Awards. – A retroactive
nontaxable award of disability benefits by the Department of Veterans Affairs (the “VA”) may
replace military retired pay that was subject to tax in prior years. If so, the law extends the statute
of limitations for recovery of the prior year taxes until the end of the one-year period beginning on
the later of the date of the VA’s determination or June 17, 2008. However, the extension does not
apply to tax years beginning more than five years before the date of the VA determination, or
beginning before January 1, 2001. (I.R.C. § 6511(d)(8), added by Heroes Earnings Assistance
and Relief Tax Act of 2008.) See Chapter 12 of the treatise for a discussion of the taxation of
military pay and VA benefits.
Recovery of Prior Year Withholding Taxes After Retroactive Award of VA Benefits. – A
retiree may be able to recover taxes withheld in prior years on military retired pay that
subsequently offsets a retroactive award of nontaxable VA benefits, even if the statute of
limitations has run for those prior years. (Vercher v. United States, ___ F. Supp. ___ (W.D. La.
August 22, 2007).) See Chapter 12 of the treatise for a discussion of the taxation of military pay
and VA benefits.
Surviving Spouse Tax Refund on Retroactive Grant of Veterans Benefits. – Disability benefits
paid by the Department of Veterans Affairs are nontaxable even if paid to a veteran’s surviving
spouse. Unfortunately, though, the Government will use the amounts of the VA disability
payments to reduce payments to the surviving spouse under the military’s Survivor Benefit Plan
(SBP). However, if the Government should retroactively replace SBP benefits with VA benefits, a
surviving spouse may obtain a refund of tax previously paid on the SBP benefits – provided the
statute of limitations has not run on the years the spouse paid the tax. Ebert v. United States, __
Fed. Cl. __ (2005). See Chapter 12 of the treatise for an explanation of the taxation of U.S.
Military and survivor benefits.
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The author intends that this website provide accurate and authoritative information on the subject matter
covered. However, the information provided on this website is not a substitute for the advice of an attorney,
accountant, or other professional; and the author is not offering legal, accounting, or other professional
advice. The material presented on this website is not intended for use, and may not be used, to avoid tax
penalties. If you need legal advice or other professional help, you should seek (from an independent
attorney, accountant, or other competent professional) advice based on your own particular circumstances.
covered. However, the information provided on this website is not a substitute for the advice of an attorney,
accountant, or other professional; and the author is not offering legal, accounting, or other professional
advice. The material presented on this website is not intended for use, and may not be used, to avoid tax
penalties. If you need legal advice or other professional help, you should seek (from an independent
attorney, accountant, or other competent professional) advice based on your own particular circumstances.
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