Military Retirement and Disability
Federal law pre-empts California law and governs military retirement and VA disability benefits pursuant to Title 10 and Title 38 of the United States Code. These federal laws, along with pertinent sections of the Internal Revenue Code to which California conforms, determine the tax treatment of these benefits.
1. What is "Military Retirement Pay"?
The military retirement system is a government-funded, noncontributory, defined benefit system. Eligibility for military retirement pay is based on years of active duty, with active duty personnel generally becoming retirement eligible after completing 20 years of service. Reserve personnel are eligible for retirement after 20 years of creditable service based on a points system, but do not typically begin to draw retirement pay until age 60. The amount of compensation is dependent on time served, basic pay at retirement, and annual cost-of-living-adjustments. Taxpayers should check with their military branch for eligibility requirements.
Military retirement pay received by a California resident for the length of military service is taxable and included in gross income. This applies to a military pension received while the retiree is a California resident regardless of where the military retiree was stationed. The Defense Financing and Accounting Services (DFAS) issues payments on behalf of the Department of Defense (DOD). Military retirement pay for length of service is reported by DFAS to the IRS and FTB on IRS Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.
2. What is "VA Disability Compensation"?
Military retirement pay issued by the DOD is separate and distinct from disability compensation issued by the Department of Veterans Affairs (VA), and is also based on different criteria and standards. Military retirees may apply to the VA for service-connected disability benefits when a service member has a disability resulting from personal injury suffered or disease contracted or aggravated in line of duty. As VA disability benefits are tax-exempt and are not reported on IRS Form 1099-R, they are not included in a retiree’s taxable income.
If the VA grants a military retiree disability benefits, or an increase in disability benefits, the initial or increased benefits may be retroactive to the date the application was filed, based on the medical information. If the original or increased VA disability benefits are retroactive, retirees receive a lump-sum retroactive payment for the benefits owed them before they start receiving their first monthly payment, or increased monthly payment. As this lump-sum retroactive payment of VA disability benefits is also tax-exempt, it is not reported on IRS Form 1099-R and is not included in a retiree’s taxable income.
3. What is a "VA Waiver"?
In order to receive both retirement pay from the DOD and VA disability benefits, military retirees are required to waive receipt of part of their military retirement pay that is equal to the amount of VA disability benefits he or she would be receiving. For example, if the military retiree were to receive $100 in VA disability benefit payments, he or she must waive receipt of $100 in military retirement pay, which means the military retirement payment amount is reduced by $100.
4. What is Concurrent Retirement and Disability Pay (CRDP)?
For qualifying retirees with a service-connected VA disability rating of 50 percent or higher, Concurrent Retirement and Disability Pay (CRDP) restores part or all of the retirement pay waived to receive VA disability compensation. CRDP was created in 2004 and included a “phase-in” period extending through the end of 2013, ultimately resulting in all qualifying military retirees receiving full military retirement pay and VA disability compensation starting in 2014.
CRDP is paid by the DOD, and no application is required. Eligible retirees receive CRDP automatically. CRDP payments are reported on Form 1099-R and are included in the retiree’s taxable income regardless of the existence of a VA disability determination.
5. What is Combat-Related Special Compensation (CRSC)?
Combat-Related Special Compensation (CRSC) is a special compensation for qualified combat-related disabilities paid by the DOD. CRSC payments are tax exempt, and retirees must apply to their Branch of Service to receive CRSC payments. CRSC operates similar to CRDP by replacing the waived amount of retirement pay, but comes in the form of tax-exempt income and has different qualification requirements. Retirees cannot receive both CRSC and CRDP, and the DOD will generally provide the entitlement that is more beneficial to the retiree.
To learn more about VA disability benefits, please refer to the VA website: http://www.benefits.va.gov/compensation/
To learn more about DOD retirement benefits, please refer to the DFAS website:
General Information: https://www.dfas.mil/retiredmilitary.html
Concurrent Retirement and Disability Pay (CRDP): https://www.dfas.mil/retiredmilitary/disability/crdp.html
Combat-Related Special Compensation (CRSC): https://www.dfas.mil/retiredmilitary/disability/crsc.html