Senate Passes Bill to End Taxation of Combat-Injured Veterans’ Severance Payments

The U.S. Senate unanimously passed legislation early Saturday to ensure that veterans who suffer service-ending combat-related injuries are not taxed on the severance payment they receive from the Department of Defense (DOD). The U.S. House of Representatives passed the legislation earlier in the week. Now the bill is headed to the President’s desk to be signed into law.

The Combat-Injured Veterans Tax Fairness Act of 2016 directs DOD to identify veterans who have been separated from service for combat-related injuries and received a severance payment that was improperly taxed by the federal government. It instructs DOD to determine how much the combat-wounded veterans are owed and allow veterans who have been improperly taxed to recover the withheld amounts.
Under federal law, veterans who suffer combat-related injuries and who are separated from the military are not supposed to be taxed on the one-time lump sum disability severance payment they receive from DOD. Unfortunately, taxes on combat-related disability severance payments have nonetheless been withheld from qualifying veterans for a number of years due to the limitations of DOD’s automated payment system. Veterans are typically unaware that their benefits were improperly reduced as a result of DOD’s actions.

U.S. Senators John Boozman (R-AR) and Mark Warner (D-VA) introduced identical legislation in the Senate in March.

“I’m pleased that the Senate passed this critical legislation to right a wrong for our veterans who were unfairly penalized for injuries they sustained while in service to our country. This will ensure that our nation’s wounded receive the benefits they earned,” Boozman, a member of the Senate Veterans Affairs Committee said.

“It is unbelievable that Congress needed to act to clear up this issue. Severance pay for service members who suffered combat-related injuries should not be taxed under any circumstance,” said Warner, a member of the Senate Finance Committee. “I am comforted by the fact that this bill now heads to the President, and soon the 700 disabled military veterans in Virginia will be able to recover the compensation they are owed for their courageous sacrifice.”
“Our soldiers, sailors, airmen and Marines risk their lives every day to protect our freedoms, our values and our republic. The revelation that there are thousands of veterans who did not receive their full disability severance pay is unacceptable. This legislation is a common-sense solution to ensure that these veterans who had their severance payment wrongfully taxed will receive every penny that they are rightfully owed. These veterans deserve no less for their service and sacrifice to our nation,” said Rep. David Rouzer (R-NC), the House sponsor of the bill.

The Senate language was included as an amendment to the Taxpayer Protection Act of 2016, which passed the Senate Finance Committee in April.

The problem of improper taxation of the severance payments to combat-injured veterans was originally identified by the National Veterans Legal Services Program (NVLSP), an independent, nonprofit veterans service organization that has served active duty military personnel and veterans since 1980. NVLSP estimates that over 13,800 veterans may have been denied full severance pay as a result of wrongful taxation, including approximately 165 veterans in Arkansas and 720 veterans in Virginia.