Most service members who are wounded in battle are awarded Disability Severance Pay. According to the Department of Defense(DOD), Disability Severance Pay is for “the veteran [who] has a combat-related injury or illness as determined by his or her military service at separation that resulted directly from armed conflict; took place while the member was engaged in extra-hazardous service; took place under conditions simulating war, including training exercises such as maneuvers; or was caused by an instrumentality of war.” Typically, Disability Severance Pay is neither taxable nor subject to federal tax withholding. But an estimated 130,000 service members since January 17, 1991 had taxes improperly withheld from their Disability Severance checks.
The Combat-Injured Veterans Tax Fairness Act passed by Congress at the end of 2016 remedies this situation and affected service members are eligible for a tax refund. The Department of Defense has sent letters to those veterans. But the DOD says “even if a veteran did not receive a letter…the individual may still be eligible for a refund. [The DOD] recommends visiting the IRS website and searching ‘combat injured veterans’ for further information [on how to file for the refund].” Estates or surviving spouses can file a claim on behalf of a veteran who is now deceased.