My client claims that 70% of his DFAS 1099-R should not be taxed due to his 70% disability rating, he also receives VA disability which is not taxed. I've seen an email going around advising veterans of this but I cannot verify it, has anyone dealt with this?
Generally, the amount as reported on the 1099-R is fully taxable as §1.122-1(d) does not grant authorities to the taxpayer to adjust the taxable amount due to net disability exclusion under §104, pursuant to §1403 of Title 10.
Instead, the DoD would, based on its own (and not the VA's) disability rating for the veteran, compute the net disability exclusion in conjunction with VA's disability compensation and report the correct taxable amount. If your client believes the taxable amount reported is not correct, he needs to work with DFAS to sort that out.
The only time when an adjustment may be appropriate, which calls for a different process, is when retroactive adjustments from the VA are made, likely due to delayed VA disability determination.
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