U.S. Military and Survivor Benefits
Lump Sum Election by Members of the U.S. Military Under the Blended Retirement System (BRS). – U.S. military retirees may take part of their monthly retired pay as a taxable lump sum at retirement if they first joined a military branch after December 31, 2017, or if they otherwise opted into the retirement system as it was revised effective January 1, 2018 (the “BRS” system). The retiree may elect (more than 90 days before retirement) to take either a 25 percent or a 50 percent lump sum. The lump sum is calculated as 25 percent or 50 percent of the discounted retired pay otherwise due a member from the date of retirement until age 67. Monthly payments before age 67 are accordingly reduced by 25 percent or 50 percent, but revert to 100 percent at age 67. The lump sum payment is immediately taxable if it is not rolled over to another plan or IRA. (10 USC § 1415; 38 USC § 5304(d).). See Chapter 14 of the treatise for an explanation of the taxation of military retired pay.
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 14 of the treatise for a discussion of the taxation of military retired 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. (Ray v. United States, 453 F.2d 754 (Ct. Cl. 1972), but see to the contrary Smith v. United States, 111 Fed. Cl. 740, 2013-2 U.S.T.C. 50,440, which involved Army disability pay rather than VA benefits.) See Chapter 14 of the treatise for a discussion of the taxation of military retired pay and VA benefits.
Surviving Spouse Tax Refund on Retroactive Grant of VA 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, 66 Fed. Cl. 287 (2005).) See Chapter 14 of the treatise for an explanation of the taxation of military retired pay and survivor benefits.