Archive for the 'VA Benefits' Category

Does the Strickland Decision Apply to You? How?

Apr 05 2012

Mention VA retroactive awards for disability compensation and the Strickland decision will make its way into the conversation. The Strickland court decision provides tax-free status to past taxable military retired pay due to the award of retroactive VA disability compensation.

We get numerous calls on this issue, and based on my discussions, there are some misunderstandings we need to clear up.  The most common is that the Strickland decision will convert taxable retired pay…amounts above and beyond the tax-free status provided by VA compensation and Combat-Related Special Compensation (CRSC)…to tax-free status.

First, let me start the discussion about members who do not qualify for concurrent receipt. You fall in two camps: 1) retirees with at least 20 years of service, are VA rated at 40% or less and whose disabilities are not combat-related, or, 2) retirees less than 20 years, with any VA rating but your disabilities are not combat-related. You represent two-thirds of the retiree/VA rated population. Bad news is you don’t qualify for concurrent receipt; good news is the Strickland decision probably does you the most good.

By the way, your group is a priority for MOAA as we fight for your concurrent receipt benefits up on the Hill.

We all know that military retired pay is taxable income and VA disability compensation is tax-free. When you qualify for VA disability compensation, you have to agree to waive your retired pay by the same amount you receive in VA compensation; aka the VA Waiver. With the VA Waiver, you trade away your taxable retired pay to receive tax-free VA compensation. This is the foundation of whether you qualify to file amended tax returns to receive a tax refund.

Consider your retired pay situation had your retired pay been docked by the VA Waiver during the VA retro award period. The VA Waiver amount would have docked your taxable pay and you wouldn’t have paid taxes on the amount of income that was docked. You can file an amended tax return for those years to seek a refund for the taxes you paid on the income you wouldn’t have received.

You have to determine what the VA Waiver amount would have been in those years by backing-up the Cost Of Living Adjustments (COLAs) and/or VA rating changes.

Next, for those of you who are eligible for concurrent receipt in the form of Concurrent Retirement and Disability Pay (CRDP) or CRSC, the retroactive tax-free status of retired pay is a little more complex.

Retirees eligible for concurrent receipt are: 1) retirees with 20 or more years of service, VA rating of 50% or greater, or, 2) retirees regardless of years of service and regardless of your VA rating whose disabilities are combat-related.

For you, your past retired pay, after the application of the VA retro award of disability compensation, may or may not have been impacted by a VA Waiver. As discussed above, this is all about the amount of tax you paid on income you wouldn’t have paid if the VA Waiver had applied in the past.

CRDP restores your retired pay by getting rid of the VA Waiver. In restoring your retired pay, the restored portion of pay is taxable; like regular retired pay since CRDP is regular retired pay. CRDP is being phased-in over the years. By 2014, there won’t be a VA Waiver for you CRDP eligibles**. During the phase-in, your VA Waiver amount is getting smaller each year. To determine what your tax refund would be for past years, you have to know what your actual VA Waiver amount was after the application of CRDP in those past years. In other words, you can’t claim a refund for the full amount of your VA compensation because your past pay wasn’t docked for the full amount of the VA compensation due to CRDP.

CRSC impacts retirees in a completely different way than the CRDP crowd. CRSC reimburses you for all or some of the amount of your VA Waiver. All CRSC recipients have a VA Waiver in their retired pay for the full amount of their VA compensation. Because the CRSC rating and payment is based only on the combat-related nature of your disabilities and not total disabilities as is a VA rating, it is possible that your CRSC amount is less than your VA compensation.

Because CRSC is tax-free and the amount will not be more than the VA Waiver amount, the amount of CRSC is not relevant to the amended tax return affected by the retro payment of VA compensation. CRSC payees will use the VA Waiver amount to determine their tax refund status over the retro period. It is the VA Waiver amount that docks the retired pay thereby making the past retired pay income waived by the VA Waiver amount eligible for tax-free status. Your situation is similar to the folks above who aren’t qualified for concurrent receipt.

Now that you know what you are looking for in past pays, I’ll provide a few details on how to file amended tax returns.

To change past taxable retired pay into tax-free pay, you have to file a separate amended tax return (IRS Form 1040X) for each tax filing year in involved. You are filing to get a tax refund for the income you paid taxes on that should have been tax-free had the VA Waiver amount been applied during the retro period.

Some details about how to apply for the tax refund were discussed in a recent article on this blog by Curt Sheldon, one of our guest authors. See Curt’s article for his practical insights at http://moaablogs.org/financial/2012/02/va-disability-benefits-retirement-pay-and-your-taxes/.

The tax code limits the time period to file amended tax returns due to the award of retroactive VA compensation to 4 years from the time of filing the taxes being amended. So a tax filing from 2008 can be amended in 2012. See IRS Publication 525 page 17 for more details (http://www.irs.gov/pub/irs-pdf/p525.pdf).

As Curt states in his article, the burden is on you to provide the background documents to make your case when you file the amended returns. Be sure to put yourself in the shoes of the IRS official reviewing your case. Assume you know nothing about VA disability compensation, military retired pay, or retroactive VA awards. Now what paperwork would you need to convince you the amended tax return is spot on?

Best wishes. When all else fails, consult an expert tax specialist.

** Technically there could be a VA Waiver amount if your retirement pay multiplier used a greater Service disability rating rather than your years of service retired pay multiplier.

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VA Disability Benefits, Retirement Pay and Your Taxes

Feb 07 2012

A lot of the readers of this blog are military members or retired military members.  For those who have or will retire from the military there is a potential tax issue you will need to resolve.  This issue comes from the fact that VA Disability Benefits are often awarded retroactively to a prior date.  To my experience, 99.99% of those us who do receive VA Disability Benefits, will receive them retroactively.  And if that is the case, that means your taxes are/will be messed up.  Here is what to do about your situation.

First the good news.  You have the right to reduce your military retirement income by the amount that your pay should have been reduced if your VA Disability Benefits would have started on time.  This right was established by the courts in the Strickland decision (Strickland v Commissioner, 4th Cir. 1976) and is codified in Revenue Rule 78-161.  That is about the end of the good news.

Now, the bad news.  You are going to get little to no “automatic” help to do this.  You won’t receive and updated 1099-R.  You might get a note from the VA saying that you have rights under the Strickland Decision.  You won’t get a notice from the IRS letting you know you overstated your income in a prior year due to the VA offset not being taken.  So, you are going to have to do this yourself or bring in a pro from Dover.

What needs to be done?

If you were awarded retroactive VA benefits in 2011 you will need to adjust the amount on your 1099-R by the reduction that should have occurred and use the adjusted amount on your tax return.  If you are like me, you’ll need to do two separate calculations, as I had to prove my sons were in college to get an increase in the Disability payment amount.  So I had a period where the offset was correct, a period where the offset was too little and a period of where there was no offset.  Now, when you file your return you’ll have to decide whether you want to e-file or not.  I’m not 100% sure, but I think your return will go through.  But your 1099-R and your tax return won’t agree and this could trigger an audit or at least some questions.  The other option is to file on paper, include a letter explaining that you reduced your 1099-R income IAW Rev Rul 78-161 and also include a copy of the letter from the VA establishing your retroactive benefits (including your 214 might not hurt either).  Easy, right?

If your retroactive benefits span two years (for example you retired in 2010 and didn’t get a determination until 2011) you’ll have to decide if it is worth your time to try to get the refund that is probably due.  If you are rated more than 50% disabled, the tax benefit may be small and you might want to just let it go.  If you are rated less than 50% disabled it may be worth your time.  What you will do in this case is file an IRS Form 1040X (amended tax return) changing your retirement income to reflect the offset that should have been taken.  Then include all the documentation mentioned above.  Even easier…

So the bottom line is: when you get retroactive VA Disability Benefits, you have the right to retroactively reduce your income.  But you’re going to have to do it yourself or hire someone to do it for you.

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New Law Change Increases VGLI Coverage Limits Available for Veterans

Jan 10 2012

New Law Change Increases Insurance Coverage for Veterans

The VA just announced that theyhave increased the limits for coverage under the Veterans Group Life Insurance (VGLI)  program. The VA press release is below. This could be a good opportunity for those veterans who need and use the VA as their life insurance provider. Keep in mind though that VGLI is term insurance, and premiums increase dramatically as we age. Many veterans determine that they can’t keep their life insurance in force later in life because the premiums are too expensive. How will you provide for your loved ones if you can no longer afford your life insurance premiums?

Take a look at the chart of VGLI premiums from the VA before you decide whether to increse your VGLI coverage.

Here is the link to the premium tables for VGLI: http://insurance.va.gov/sglisite/vgli/VGLI%20rates.htm 

Those are the monthly rates. Download the chart for a good view, broken down by monthly, quarterly, semi-annual and annual rates, of how much this insurance costs. Take a look at the costs at age 70 and beyond. Will you be able to pay those rates in later life? Obviously, you’ll need more than VGLI to complete your financial planning.  

With all life insurance, it pays to shop around and do your homework.

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WASHINGTON – Some Veterans covered under the Veterans Group Life Insurance program (VGLI) now have the opportunity to increase their coverage to the current maximum coverage under the Servicemembers’ Group Life Insurance (SGLI) program.

“Currently, 70 percent of the Veterans covered under VGLI are under age 60, have less than $400,000 of coverage, and will greatly benefit from this law change,” said Allison A. Hickey, Department of Veterans Affairs under secretary for benefits.

Under the Veterans’ Benefits Act of 2010, enacted on Oct. 13, 2010, Veterans can increase their coverage by $25,000 at each five-year anniversary date of their policy to the current legislated maximum SGLI coverage, presently, $400,000.
To date, approximately 21 percent of eligible Veterans have taken advantage of this opportunity, resulting in nearly $113 million of new coverage being issued.

The VGLI program allows newly discharged Veterans to convert their SGLI coverage they had while in the service to a civilian program. Before enactment of this law, Veterans could not have more VGLI than the amount of SGLI they had at the time of separation from service.

For example, those who got out of the service prior to Sept. 1, 2005, when the maximum SGLI coverage was $250,000, were limited to $250,000 in VGLI coverage.

Now on their first five-year anniversary, these Veterans can elect to increase their coverage to $275,000. On their next five-year anniversary, they can increase the coverage to $300,000, and so forth.
The additional coverage can be issued regardless of the Veteran’s health. To be eligible to purchase this additional coverage, the Veteran must:

• Have active VGLI coverage,
• Have less than the current legislated maximum coverage of $400,000,
• Request the additional coverage during the 120-day period prior to each five-year anniversary date, and
• Be less than 60 years of age on the five-year anniversary date of his or her coverage.

Eligible Veterans are notified of this opportunity a week before the start of the 120-day period prior to their anniversary date, and twice more before the actual anniversary date.

For more information about VA’s Insurance Program or other VA benefits, go to www.va.gov or call 1-800-827-1000. Veterans are also encouraged to visit VA’s web portal eBenefits – Insurance.
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The VA and Planning for your Final Days

Dec 29 2011

Published by under VA Benefits

Are you a person who planned ahead and prepared legal documents such as a durable power of attorney for health care, a living will, and a power of attorney for your other personal/financial affairs? Well, if you have contact with any VA services, you would probably be well served by filling out the VA’s specific legal documents to make things really official.

You see, the VA is federal and your legal documents are based in state law. That can make things confusing depending on where you signed your state documents, what your state of residence was at the time of signature, your state of residence when you are patient, or where your treatment as a patient is administered. We military retirees are a mobile group.

The VA Advanced Directive for Durable Power of Attorney for Health Care and a Living Will is VA form 10-0137. The VA power of attorney forms to appoint a Veteran Service Office or an individual as your representative to handle a VA claim or appeal are VA form 21-22 and VA form 21-22a respectively. All are available on-line, just Google the form numbers or go by your VA office or Veteran Service Office (VSO). Find a local VSO at http://www.va.gov/statedva.htm to ask specific questions.

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The GI Bill and 529 Plans…Maybe Not as Straight Forward as You Think

Dec 01 2011

Some of you may have decided to use your post 9/11 GI Bill for your children’s education.  Some of you may have also set up a 529 Plan to help pay for their college education.   If you have both in place, you have the possibility to pay for your children’s college at a reduced price and potentially with tax advantaged funds.  BUT…the tax ramifications are not straight forward and you’ll want to think this one through before you “pull the trigger”.

First of all,  Veterans Administration (VA) benefits are always tax-free.  You will not pay taxes on the amount the VA pays for tuition and fees, the monthly Basic Allowance for Housing (BAH) or the book allowance.  Ever.  So that part is pretty straight forward.

But using your 529 Plan assets is a little more complicated.  Distributions from a 529 Plan are tax-free IF they are used for qualified educations expenses.  But, qualified education expenses must first be reduced by any tax-free education assistance received.  So, if you use 529 Fund assets for expenses already covered by the GI Bill you may owe taxes and a potential penalty.  Here are some specific examples:

GI Bill covers full tuition and fees (in state) and student has no other qualified expenses.

In this case, since the GI Bill covers full tuition, any withdrawal from a 529 Plan would be subject to tax and penalty.  The tax would be on the amount of the distribution that is classified as “earnings” and the penalty is an additional 10% tax on the earnings.

GI Bill covers a portion of the tuition and fees (out-of-state or private school) and student has no other qualified expenses

In this case, since there is a difference between the tuition paid and the amount covered by the GI Bill, then an amount equal to that difference can be withdrawn tax-free.  Any amount over the excess would be subject to tax and penalty.

GI Bill covers all or a portion of tuition and fees and student has room and board expenses

This situation is a little less clear.  IRS Pub 570 states that you must reduce the total qualified education expenses by tax-free educational assistance received.  This amount is called the adjusted qualified education expenses.  To calculate it the amount of GI Bill received to pay for tuition and fees will be deducted from tuition and fees paid only.  Also, in this case, since room and board are included as qualified expenses then I believe the BAH received should be used to reduce the qualified education expenses which in this case include room and board.  But…the IRS Pub isn’t clear.  Like in situation one and two above, if the amount withdrawn exceeds the adjusted qualified expenses, the excess is subject to tax and penalty.  This is one where you will want to talk to your personal tax advisor and get a determination based upon your specific situation.

So based on these restrictions what happens when you can’t use all the money in the 529 Plan for qualified education expenses.  There are a couple of “outs”  First, you can roll the funds over to another child, grandchild, spouse and certain other qualified people.  Also, again in my interpretation, since you could not use all the funds due to VA benefits, you can withdraw the funds without penalty.  You’ll still owe taxes on the earnings but you won’t pay the 10% penalty.

So there you have it.  529 Plans and the GI Bill do work together, but the tax consequences are a little complicated.

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