The Combat-Injured Veterans Tax Fairness Act of 2016This act allows veterans who received a lump sum disability severance payments more time to file a claim. This is a credit or a refund of an over payment. The law ordered the Secretary of Defense to classify disability severance payments paid after January 17, 1991. W-2 Forms and Wage and Tax Statements considered them wages. These payments are now nontaxable. The Department of Defense is mailing letters to affected veterans (letters 6060-A and 6060-D) in July 2018.

What this means for some veterans

Medically discharged veterans may receive a one-time lump sum severance payment. Disability severance pay becomes taxable income unless it is a combat-related injury. The Department of Veterans Affairs (VA)  officially approves rights to disability benefits.

What you need to do

You must complete and file IRS Form 1040X,  This is an amended U.S. Individual Income Tax Return. 

  • 1 year from the date of the Department of Defense notice, or
  • 3 years after the original due date and when  the disability severance payment was made
  • 2 years after tax was paid for the year the disability severance payment was made.

It’s not too late to file. Eligible veterans must 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. See the FAQs for additional information.