Taxability of Combat-Related Military Retired Pay

This post is designed to help those of you who have been medically retired under Chapter 61 and receive a “V” Code from the Army PEB or its equivalent from the Air Force, Coast Guard, or Navy PEBs for a combat-related determination.

For some reason, DFAS personnel have shown a particularly low knowledge level of this income tax withholding issue as of late and are telling Chapter 61 retirees with combat-related determinations that their retired pay is not tax-free unless they receive CRSC.

If you are one of these individuals, please refer the DFAS personnel to their own regulation regarding federal income tax withholding which may be found in Section 2.2.3 of Chapter 24 of Volume 7B of DoD 7000.14-R, Financial Management Regulation regarding the Computation of Wages Subject to Federal Income Tax Withholding, as shown below:

“2.2 Not Subject to FITW The gross retired pay of a member may not be subject to FITW if the member is on the Temporary Disability Retired List (TDRL) or Permanent Disability Retired List (PDRL), receiving disability retired pay and if:

2.2.3. The member is receiving disability retired pay because of a combat-related injury. The term “combat-related injury” means personal injury or sickness incurred as a direct result of armed conflict, or while engaged in extra hazardous service, or under conditions simulating war, or caused by an instrument of war. See 26 U.S.C. §§ 1See DoD Instruction (DoDI) 1332.18, Disability Evaluation System (DES); “

For your convenience, I have attached a copy of the regulation to this post.