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No matter what you've heard from other retirees or from chat forums on the internet, military retirees with 100% Permanent and Total (P&T) VA disability rating cannot (I repeat - CANNOT) have their federal taxes exempted on their military retirement.  Only service members that are medically retired and have specific details of their medical retirement written into their retirement orders can request to have federal taxes on their military retirement annuity exempted under the IRS (Internal Revenue Service).

 

Your personal tax deductions and general tax situation should dictate your request for exemption. You must weigh the potential tax bill at the end of the year if you have your federal taxes exempted versus the zero interest loan you give the IRS if your federal taxes are not exempted.  If your spouse is self-employed and you have a wealth of deductions ranging from home office expenses to mileage, you might be able to balance out being classified as exempt.  If you typically pay taxes each year as opposed to getting a refund and have difficulty meeting this obligation, filing the IRS W-4 exemption form will likely make this situation worse.

 

Use the IRS Withholding calculator at IRS.gov to help you with your decision.

 

Whether a military retiree with 100% P&T should file an IRS W-4 form to exempt the retiree from having federal taxes withheld on their pension annuity is a question that should be seriously considered by the retiree before proceeding.  Contact Newman V. at Overseasveteran.com for the paperwork that must be filed annually with the Defense Finance Accounting Service (DFAS) and the IRS.

 

DFAS official response below:

 

Dear Newman Veter,

 

Filing "exempt" simply means you are requesting nothing to be withheld from pay for taxes and it does NOT make pay non taxable. Receipt of a disability pay from any other agency does not make pay from DFAS nontaxable.

 

We show you are not medically retired by your Branch of Service (your orders indicated that your injuries/disabilities were not incurred in the line of duty or by instrumentality of war), and you have no VA waiver on your pay. Your retired pay is reinstated under the CMRP, (Formerly CRDP) of pay laws, and CMRP is taxable. Your VA Disability pay is your non-taxable income.

 

Members are solely responsible for tax withholding and can generally choose to have withholding or not choose to have withholding from their taxable income. DFAS has no say in this and if a member chooses to have no withholding from taxable income any questions about tax liability or tax debt for failure to withhold taxes from taxable income must be directed to the IRS:

 

1 (800) 829-1040

 

The IRS is fully aware that most pay from DFAS is in fact taxable as they are the agency responsible for governing taxability of pay and they require DFAS to report taxable income.

 

There are only two circumstances that make pay from DFAS nontaxable:

 

You were in the military or under a contractual obligation to join the military on September 24, 1975, or your military disability rating is combat-related (awarded by your branch of service not the VA and retirement under a disability law)

 

If you receive a form 1099R reporting taxable income you do not meet either of the criteria listed above for non taxable pay.

 

If you claim your retirement pay should be entirely exempt from Federal Income Tax Withholding (FITW), the IRS requires that you re-certify this status each year by submitting a new W-4 Form. If you do not re-certify your "Exempt" status, your FITW status will default to "Single" with zero exemptions. Please allow 30 days for processing of your request.

 

Please fill out the new 2024 W-4 form ( make sure to write "EXEMPT" on the form):

Fax your W4 form to 1-800-469-6559, or mail it to:

DFAS U.S. RETIRED PAY

8899 E 56th STREET INDIANAPOLIS IN 46249-1200

 

Allow 30 days for processing once received by DFAS.

 

Thank you for allowing us to assist with your askDFAS inquiry. If you have any questions or require additional information, you may submit another inquiry via askDFAS or contact a Representative at 1-888-332-7411. Customer Service Representatives are available Monday through Friday from 8:00 a.m. to 5:00 p.m. EST.

 

Respectfully,

DFAS Customer Care Center

We are committed to providing quality service to our customers.