Military VA exclusion of retirement income

[Jtax LLC]

Has anyone done a return for a retired military service member and excluded some of the retirement due to a 100% disability rating?  Is there a form or a button we should click in the software or do we just do a manual subtraction of the income?

Retroactive VA disability determination

If you retire from the Army based on years of service and are later given a retroactive service-connected disability rating by the VA, your retirement pay is excluded from income up to the amount of the VA disability benefits you would have been entitled to receive. You can claim a refund on any taxes paid on the excludable amount by filling an amended return on Form 1040x for each previous year during the retroactive period (subject to statute of limitations).

You may exclude 100% of any severance benefit from your income if you receive a lump-sum disability severance payment and are later awarded VA disability benefits. However, any lump-sum readjustment or other non-disability severance payment you receive upon your release from active duty must be included in your income even if you are later given a retroactive disability rating by the VA.

[Camp1040]

I have not seen a 1099-R ever issued for lump sum disability payments or current VA pension disability. You should receive the 1099-R for the portion that is not considered disability payment.

[jnkniffencpa]

I have a similar issue where a client was deemed 100% disabled and withheld about 4 months of his DFAS retirement. His 1099R still reflected the full amount but the VA sent a letter indicating he could exclude the withheld portion from taxation. Anyone have thoughts on how to exclude that to avoid a notice from the IRS?

Thanks

[Brenda17]

How would you reduce VA disability benefits where VA withheld the benefits to prevent an overpayment for 2023 from the Military pension. Amount required to reduce is $1322 from the 1099 R from the DOD schedule 1? 

[Camp1040]

I don't know, but VA disability benefits are not taxable.