Some combat-wounded vets could see a windfall thanks to tax fix passed by Congress

Thousands of combat-wounded veterans are in line for big payouts from the Defense Department after lawmakers passed a fix to severance package problems before leaving town last weekend.

And many may not know they’re owed any money.

The Combat-Injured Veterans Tax Fairness Act of 2016, expected to be signed into law by the president in the coming days, mandates the department stop improperly taxing severance payouts for troops wounded in war zones, and requires Pentagon officials to identify any veterans whose benefits were improperly taxed.

Under existing federal law, any service member who suffers a combat-related injury and is separated from the military is owed a one-time, lump-sum disability severance payment, based on their rank and years of service. That payout is supposed to be tax-free.

But officials from the National Veterans Legal Services Program, which has been fighting with bureaucrats for years on the issue, say the Pentagon routinely takes taxes out of the severance pay, despite warnings from groups like theirs.

They estimate the new law will benefit almost 14,000 individuals. For some, it will mean a sudden windfall of tens of thousands of dollars they should have received years ago.

“Our government wrongfully withheld $78 million from thousands of disabled combat veterans over a period of several decades,” Tom Moore, an attorney at NVLSP, said in a statement. “Thousands of our nation’s disabled veterans are one step closer to receiving a remedy to fix this egregious oversight.”

NVLSP officials had considered a lawsuit to force repayment of the money, but because of the large total of funding involved opted for legislative action instead. The measure passed both the House and Senate without opposition.
Veterans who noticed the error had three-years to file amended tax returns to recover the money, advocates say, but many individuals who had their payouts illegally docked never even noticed the problem. The legislation effectively erases that window.

Lawmakers behind the effort called it an obvious fix to an upsetting mistake.

“The revelation that there are thousands of veterans who did not receive their full disability severance pay is unacceptable,” said Rep. David Rouzer, R-N.C., the House sponsor of the measure. “This legislation is a common-sense solution to ensure that these veterans who had their severance payment wrongfully taxed will receive every penny that they are rightfully owed.”
Sen. Mark Warner, D-Va., called the problem “unbelievable” and said Congress should not have needed to step in to “recover the compensation (veterans) are owed for their courageous sacrifice.” Sen. John Boozman, R-Ark., called the fix “righting a wrong for our veterans.”

Still, the measure took nearly a year to wind through both chambers, only passing the Senate in the final minutes of the legislative session last weekend.

Pentagon officials have a year to review all lump-sum disability severance payments in the last 25 years to identify anyone who is owed money. If eligible, veterans will have one year after notification of the mistake to apply to recover the funds.