Transition Tax Topics: The Strickland Decision and IRR 78-161

Welcome to Curt's Chalk Talk, the transition tax topic series. I'm Curt Sheldon with C.L. Sheldon & Company and today we want to talk about a very special one-time good deal as it comes to your taxes. And that has to do with what's known as the Strickland Decision or Internal Revenue ruling 78-161.

Now what this has to do is the fact that while you get your VA disability rating, some time will pass, it won't happen instantaneously. And during that time you'll be accruing retroactive benefits. And those benefits will eventually be awarded to you.

Now this applies specifically if you're less than 50% disabled. Because if you're less than 50% disabled, when you receive your VA compensation, your military retirement is reduced by that VA compensation amount, basically dollar for dollar. So, your taxable income goes down. Your compensation remains the same but the taxable income goes down.

Now here comes the rub, DFAS or the Veteran's Administration won't do anything to correct that error and when you get your 1099R, what the heck's a 1099R? It's what you get instead of a W-2 when you're retired. When you get that 1099R, it won't reflect the fact that some of your pay should have been tax free.

Under the Strickland Decision or again ruling 78-161, you have the right to correct your 1099R to show the offset that should have been taken. Now, once your determination is made, you'll be good going forward. This only applies to the time while your claim was being adjudicated. And again, it doesn't apply for those more than 50% disabled because your disability goes on top of your retired pay as a separate pay stream, so there's no offset.

Are you concerned about your finances as you make the transition from active duty to the civilian role? Well, we've got a checklist to help you out. If you'd like to get one, go to www.clsheldon.com/tax. That's www.clsheldon.com/tax.