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Financial Information for Senior Military Officers

The Strickland Decision, Part Deaux!

The Strickland Decision, Part Deaux!

 

I received a question the other day from one of my tax clients that got me thinking about the Strickland Decision and tax calculations. So, I thought it might be a good time to revisit the Strickland Decision and how it applies to those military retirees who are rated 50% or more disabled. Your tax consequences can vary a great deal depending on how your “offset” is made up. But we should start with a review.

The Strickland Decision. What is It?

The Strickland Decision is a court case where a retired servicemember sued the IRS/Federal Government claiming the right to retroactively reduce his income by the amount of VA Offset that should have been taken from his retired pay. The result of the court case is Internal Revenue Ruling (IRR) 78-161. IRR 78-161 allows a retired veteran to reduce retirement benefits by the amount of VA offset that should have been taken (assuming a delay in receiving a VA Disability rating…a pretty good assumption).

 

VA Offset?

US Code essentially says that you must reduce retirement benefits by the amount of VA Disability received. This is still the case for those less than 50% disabled. For every dollar received in VA Disability Compensation, Military retired pay is reduced by one dollar. Where it becomes complicated is for those rated 50% or more disabled. In 2004 Congress changed the law to allow retirees rated more than 50% disabled to receive both VA benefits and military retirement. Concurrent Receipt is being phased in and will be fully implemented in 2014. From a government accounting standpoint though, your pay is still reduced and then is replaced by CRDP or CRSC and this can significantly affect your taxes.

CRDP vs. CRSC

Now, remember, we’re talking about government accounting so logic doesn’t necessarily apply. To review…

  1. Your retirement pay will be reduced by the amount of your VA benefit (even if you are 50% or more disabled)
  2. If you are 50% or more disabled then the reduction will be replaced by
    1. Concurrent Retirement and Disability Pay (CRDP) or
    2. Combat Related Special Compensation (CRSC)
  3. The major difference between the two from a financial planning standpoint is that CRDP is taxable to the retiree while CRSC is not.

Beyond that CRDP is “automatic” if you are rated 50% or more disabled, then you will automatically received CRDP. To receive CRSC you must apply to your Parent Service and your disability must be Combat or Combat Training related (you also can qualify for CRSC with 10% or greater disability)

What is the Bottom Line?

For those recently retired, if you are 50% or greater disabled and receive CRDP in most situations applying for relief under IRR 78-161 will most likely NOT result in a significant tax reduction. For those receiving CRSC for a significant disability and if the delay in receiving your VA rating was more than a month or two, it is definitely worth the time to refigure your taxes and see how much you could save.

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