On December 16, 2016, President Obama signed the Combat-Injured Veterans Tax Fairness Act of 2016 into law. Many veterans who were separated from service as a result of combat injuries were paid a lump-sum disability payment upon separation. Congress’s initial intentions were to have the severance payments be tax free for the years of dedicated service.
It was recently discovered that the Department of Defense (DOD) had improperly withheld taxes from combat-related injuries since 1991. According to Internal Revenue Code Section 104 (b)(3), a combat-related injury is defined as a personal injury or sickness which is incurred as a direct result of armed conflict while engaged in extra hazardous service or under conditions simulating war.
The bill directs the DOD, within one year after the enactment of this Act, to identify the severance payments to veterans who were improperly taxed after January 17, 1991. The DOD will provide to each of the veterans a notice of the amount that was improperly taxed along with instructions for filing amended tax returns to recover the amounts.
According to the bill sponsor, Rep. David Rouzer (R-NC), more than $78 million is owed to an estimated 14,000 veterans because of this error, and this law represents “a common-sense solution to ensure that every veteran who has had their severance payments improperly taxed receive every penny that they are rightfully owed.”