Friendship Is Rare

Does anyone have a friend that dates back to first grade? I don’t mean an acquaintance either. I mean someone that’s been there almost your entire life through thick and thin. Someone who is more like a brother or a sister than a friend. I’m happy to report that I got one. I’m also happy to report that he decided to write an article for my blog!

Now, I believe it’s good etiquette that people who host blogs introduce anyone who writes a guest post. In fact, that’s what Darrow Kirkpatrick did for me when I wrote Part 8 of the Pension Series for his blog. However, in this case, my friend interwove his story into the blog post. So instead of a long-winded introduction, I’ll simply say:

Here’s a great post on the tax benefits of VA disability from a best friend of mine that I’ve known since 1982!

FOGM, In His Own Words …

As a good Friend of Grumpus Maximus (FOGM) and an avid reader of his blog, I recently suggested he write a post about the additional benefits earned and granted by the Department of Veterans Affairs (VA) through Disability. He agreed, but since he’s such a swell guy (read: master manipulator), he suggested I write the post based on my recent and extensive knowledge on the subject. Fooled by his flattery, I took him up on the offer. Here it goes…

First, here’s a little bit about me. I recently retired as a Naval Officer with twenty years of service. I “punched out” to live the life of a retiree. The retirement process forced me to figure out what to do with the rest of my life. I was pretty lucky growing up since my father was on the benefits committee for his company. He (thankfully) showed me the value of saving early and the power of compounding interest. These lessons set me up at an early age for retirement. That said, I don’t have a background in finance or financial planning. I also made some of the same mistakes Grumpus did, so take that as fair warning.

The VA Disability Process

Before I discuss what benefits are available from the VA, I want to provide some information on the process. All of the info can be found on VA.gov, and I encourage you to conduct your own research. First off, when you retire and submit a claim for compensation from the VA, there are numerous forms to gather and fill out. This includes medical records, marriage certificates, birth certificates, etc. All of them play a role in the final determination of your claim and possible compensation. As a result, I suggest using a Veterans Service Organization (VSO) to help with the process.

Veterans of Foreign Wars (VFW) and Disabled American Veterans (DAV) are two that you will hear about during your transition classes, but I suggest you shop around to see who can help, and who has the best reputation in your area. Once you file the claim, you can upload as much or as little documentation to support your claim as you want on the VA’s web portal called “eBenefits“. You can also use eBenefits to track your claim. Once adjudicated, you can even use eBenefits to view the final determination, and the disability decision documentation. Speaking of the final determination, that is where I want to start the discussion on the power of disability compensation.

What is VA Disability?

So, what is disability compensation? According to the VA: “Disability compensation is a monthly tax-free benefit paid to Veterans who are at least 10% disabled because of injuries or diseases that were incurred in or aggravated during active duty, active duty for training, or inactive duty training.”. What that means to you, is if the VA determines you have a disability greater than 10%, you get a tax-free check from the VA. This is in addition to your retirement check from the Defense Finance and Accounting Service (DFAS). The payment from the VA comes in two flavors based on your disability rating, 10%-40% (VA rounds to whole percentages divisible by 10) and above 50%. Let’s take a look at each.

A Below 50% VA Rating

First, I’ll examine the tax implications of a VA Disability rating below 50%. If the VA rates you between 10% and 40%, they send you a monthly check that offsets your monthly military pension. Here is an example:

Let’s say your monthly retirement check from the government is $3000, the VA rated you at 30% disabled, and that you are single with no dependents. Using the most recent tables, found here, you are eligible for a payment from the VA of $417.15 a month. This payment is tax-free and subtracted from your retirement pay, so you will receive $2582.85 from DFAS and 417.15 from the VA. In aggregate, you still receive $3000 a month in income. However, you only pay federal taxes on $2582.15. In essence, you only pay Federal taxes on 70% of your retirement pay.

By the way, I’m not going to get into state taxes, as there are too many differences. I would encourage you though to research the rules for your intended state of residence in retirement. Alternatively, if you’re open to the idea of geoarbitrage, you could always read the article Grumpus wrote for the Pension Series on the various pension tax rules at the State level.

Above 50% VA Rating

Now, let’s examine what happens if the VA rates your disability above 50%. I’ll start by noting that the National Defense Authorization Act of 2003 created something called Concurrent Retirement and Disability Pay (CRDP). CRDP states, if eligible, a person with a disability rating above 50% can receive military retirement pay in addition to VA compensation. You can read more about it and how to determine eligibility on the DFAS website here.

So what does this mean to you in practical terms? Let’s take a look at another example using the same assumptions as before ($3000 a month retirement, single veteran), but this time we’ll up the disability rating to 70%. In that case, you’d receive $3000 from DFAS (taxable) and $1365.48 from the VA (tax-free). Thus, you’d pay federal taxes on the full amount of your monthly military retirement ($3000), but you’d receive an additional $1365.48 a month from the VA tax-free. The total monthly payment you’d receive is $4365.48, which is a large difference from the 30% VA disability example.

As the examples above demonstrate, compensation from the VA can provide a huge boost to your earning and savings power, especially if CRDP is involved. Based on the first example, a veteran earns $36,000 a year but only pays federal taxes on $30,994.20. In the second example, a veteran earns $52,385.76 a year but only pays federal tax on $36,000. Either way, those totals add up over time and have huge implications when it comes time to pay taxes.

What They Don’t Tell You

Oddly enough, I didn’t discover the tax advantages of VA benefits until a couple of months ago. The instructors didn’t cover it well in my transition classes. I erroneously believed that the government would tax my pension based on my VA disability rating. For example, if I was rated 10% disabled, the Federal government would tax 90% of my pension. Or if I was rated 70% disabled, they’d only tax 30%. I didn’t know about CRDP, or what it could potentially mean for my total retirement compensation.

Additionally, it’s worth noting something called Combat-Related Special Compensation (CRSC). You can apply for it if a disability is directly related to a combat incident. This is not automatic, like CRDP. You must apply for it, and it is service specific. More information can be found here.

One Last Bit of Advice

Based on my experience, the best advice I can give is start early. As soon as you decide to retire, gather all the documentation required. Once your retirement orders arrive, find a VSO you can trust, and submit your claim to the VA so you can start the assessment process. Individual results may vary, but I submitted my claim in August, completed my medical appointments with the VA appointed medical group (they outsource it in my region) in late September, and had my final rating determination in January. Finally, if you receive a 10% or higher disability rating, VA compensation is back-dated to your retirement date regardless of when the determination was made.

I hope you found this post helpful. If you have any specific questions, please pass them to Grumpus. He owes me now that I’ve written an entire post for him, and bought him dinner the last time I saw him. Seriously though, I will do my best to answer them. Good luck on your retirement journey.

FOGM…