Last week President Obama signed the Combat-Injured Veterans Tax Fairness Act of 2016 into law. Severance payments to veterans of the US Armed Forces are not and were not taxable income when due to combat-related injuries. However, the Department of Defense (DOD) had been improperly withholding tax on those payments, even when the payments didn't constitute taxable income.
Previously, veterans had to file a return or claim for refund to get that withholding back. Some veterans who didn't otherwise have taxable income may not have filed a return, and may not have known if or how they could that withholding back. Ordinarily, any taxpayer has three years from the due date of the return for any particular tax year to claim a refund of withholdings. This law change allows affected veterans to file a claim for refund for the longer of the normal three year period or one year after the date DOD informs service members of the amount improperly withheld from their severance.
In a rare bipartisan measure, this act quickly moved through Congress before its winter recess and with President Obama's term ending next month. Both parties agreed that this was a fair and common sense measure to remedy a measure of unfairness impacting certain discharged service members who were losing a portion of their severance because due in no small part to the government's own wrong doing.
If you find yourself in this situation, and want to file a refund claim to get those withholdings back, let us know and we can help you with this.