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How VA Disability Compensation Affects Military Retirement Pay

If you have a VA service-connected disability rating of 10% or higher, you are eligible to receive a monthly compensation check from the VA. The monthly compensation payments vary by your disability rating—and if your rating is 30% or higher—the rates are increased, depending number of dependents you have filed on your claim.

VA Disability Compensation Affect Mliitary Retirement Pay

You can be eligible to receive VA disability compensation even if you didn’t retire from the military. But if you are retired from the military and are also eligible for VA disability compensation, determining how much you get paid, and from where, can seem complicated. You see, until 2004, it was against the law to receive military retirement pay and VA disability compensation at the same time. Retirees had to choose which pay they wanted to receive, and if they chose to receive their VA disability compensation, those funds were “offset,” or deducted, from their military retirement pay.

There have been two major changes to this law in the past decade, and some veterans may be eligible to receive their full military retirement pay along with their VA disability compensation. These laws are:

It is possible to be eligible for both of these programs, however, you can only receive the additional monetary compensation from one of them. Veterans who qualify for both plans will be given the choice of which they wish to receive when they apply for their benefits. But you can also change your election if your situation changes. CRDP sends out open season letters annually each December; veterans must select their choice by the end of January.

Let’s examine your options if you are eligible for military retirement pay and VA disability compensation: There are a lot of rumors, myths, and misconceptions about how VA disability compensation affects military retirement pay. So let’s take a look at some of those rumors and misconceptions and break them down so you have a clear understanding of how these forms of compensation work together.

Comparing VA Disability Compensation and Military Retirement Pay

Military retirement pay and VA disability compensation are entirely separate forms of compensation. They are paid from different agencies, and paid from different buckets of money. They also represent two different forms of compensation. Military retirement pay is a pension that is based on your years of service. VA disability compensation is a monetary award that is based on your decreased ability to perform work after leaving the military.

Taxable vs. Non-Taxable Income: Military retirement pay is taxable by the federal level, and is taxed by most states (some states do not have an income tax or do not tax military retirement pay). VA disability compensation, however, is considered non-taxable income by the federal government (I am not aware of any states that tax VA disability compensation). This has a big advantage: dollar for dollar, VA disability compensation gives veterans more spending power than military retirement pay because VA compensation is never taxed.

What Happens When You Are Eligible to Receive Retirement Pay & Disability Compensation?

To best answer this question, we need to examine your disability rating. If you have a combined disability rating of 50% or greater, you should be eligible to receive Concurrent Retirement Disability Pay (CRDP). If you receive CRDP, you will receive your full military retirement pay along with your full VA disability compensation. There will be no reduction to your military retirement pay.

If you have a combined VA service-connected disability rating of 40% or lower, then you are not eligible for CRDP. However, if you have a service-connected disability that is considered a combat-related disability, then you may be eligible for Combat Related Special Compensation (CRSC). CRSC also replaces the VA disability offset, and will increase your total compensation, even if you don’t have a combined rating of at least 50%. We will explain CRSC in more detail later in the article, and link to a full length article that gives even more detail.

If your combined disability rating is 40% or lower and you do not have a combat-related disability, then your military retirement pay will be offset, or deducted, by the amount of VA service-connected disability compensation you receive.

Let’s take a look at these special conditions in more detail, and run some numbers to show you how valuable these benefits are.

Concurrent Retirement Disability Pay (CRDP)

Concurrent Receipt Laws: Up until 2004, the law prevented military retirees from receiving part or all of their military pay if they also received disability compensation from the VA. Military members had to choose which payment they wanted to receive: military retirement pay, or VA disability compensation. If they chose to receive both forms of payment, they had to offset, or waive, a portion of their military retirement pay equal to the amount they received from the VA. Basically, it prevents servicemembers from double-dipping and receiving compensation from both the VA and the military.

In 2004, the law was changed, and military retirees were eligible to receive both military retirement pay and VA disability compensation, but only if they had a VA service-connected disability rating of 50% or higher.

Here is how the compensation breaks down if you are eligible to receive both types of compensation:

  • VA disability rating of 40% or lower. Military retirees who choose to receive VA disability compensation will have their military retirement pay offset by the amount of compensation they receive from the VA. Most retirees choose to receive their VA disability compensation because it is tax-free income, while their military pension is taxed by the federal government and by most states. They still receive the same amount of total compensation they otherwise would have received, however, the VA compensation portion is tax-free, giving them more spending power.
  • VA disability rating of 50% or greater. Military retirees with a disability rating of greater than 50% are eligible to receive both payments under CRDP. They will receive their full military retirement pension, along with 100% of their VA disability compensation. They do not need to offset their military pay by the amount of the compensation they receive from the VA.

The difference between a disability rating of 40% and 50% can literally mean a difference of thousands of dollars per year because the difference comes in the form of the increased disability compensation at the higher rate, along with the full military pension that is not offset by the concurrent receipt laws. Let’s run through an example.

Example: How is Military Retirement Pay Offset by VA Compensation?

If your VA disability rating is 40% or lower, your military retirement pay is offset by the amount of your VA compensation. In other words a 40% disability rating doesn’t mean 40% of your retirement pay is tax free. It means you receive tax-free compensation from the VA at the 40% rate, and your military retirement pay is deducted by that amount.

Let’s look at an example.

Let’s say our retiree earns a monthly retirement check of $2,000. Let’s also assume he has a VA service-connected disability rating of 40%, and he has one dependent (a spouse). His VA disability compensation would be $641.28/mo (2014 rates; see full rate chart here).

He would receive $641.28 from the VA, which would be tax-free. He would then receive $1,358.72 as his military retirement pay ($2,000 – $641.28 = $1,358.72).

The total amount still equals $2,000 per month. But $641.28 of that is tax-free income. The overall affect gives the veteran more spending power.

You can also see how this uniform method for computing the VA disability offset is easier than awarding retirees a percentage of their pay as tax free.

The Value of Concurrent Receipt is Enormous

As you can see from the example above, the main benefit of the VA disability offset is receiving the tax-free pay from the VA. The final dollar amount is the same, but the tax-free portion gives the veteran greater spending power than if he received the full value of his pension from the military with no VA offset.

But the amount would be much greater if the veteran received both forms of compensation under Concurrent Retirement Disability Pay laws. The increase would mean the full value of the military retirement pay, plus the full value of the VA disability compensation. Going from a 40% rating ($641.28) to a 50% rating ($901.83) is huge. Not only does the VA disability compensation increase by $260.55 per month, but the $641.28 is not deducted from the military retirement pay. The net effect is this:

  • 40% disability rating: $2,000 total ($1,358.72 taxable; $641.28 non-taxable)
  • 50% disability rating: $2,901.83 total ($2,000 taxable; $901.83 non-taxable)

The difference is an increase of $10,821.96 per year, none of which is taxable income.

Learn more about Concurrent Retirement Disability Pay (CRDP):

Combat Related Special Compensation (CRSC)

Now that we have discussed Concurrent Receipt, we need to add one more special case for receiving both military retirement pay and VA disability compensation: Combat Related Special Compensation (CRSC). To qualify for CRSC, you must have a service-connected disability rating that is considered combat-related. There are a few other eligibility criteria:

  • You must be a military retiree (Active or Reserve with 20 years or creditable service; Chapter 61 medically retired with less than 20 years of service; Retired under Temporary Early Retirement Act (TERA); or  retired under the Temporary Disabled Retirement List (TDRL)).
  • You must have a VA service-connected disability rating of at least 10% that is considered to be combat-related.
  • Your military retirement pay must currently be reduced by the VA disability offset.

Here is the interesting part: the injury doesn’t have to be from direct combat. Disabilities may be considered combat-related for CRSC purposes if they are a direct result of:

  • Armed Conflict / Combat: direct or indirect wounds that happened during armed conflict.
  • Hazardous Duty: demolition duty, diving, parachuting, aerial flight, and more.
  • An Instrumentality of War: An injury sustained from exposure to an instrumentality of war, such as a weapon or weapon systems specifically designed for military duty or warfare. This can include certain military combat vehicles, vessels, aircraft, or an injury or sickness caused by exposure to fumes, gases, or chemicals. Agent Orange exposure would qualify as an instrumentality of war.
  • Simulated War: Activities such as military training, exercises, airborne ops, live fire exercises, hand-to-hand combat training, and more. This does not include standard physical training such as running, jogging, or group sports activities.

Eligibility Dates: Anyone can be eligible so long as they meet the above criteria. This includes military retirees who have been retired for decades, or someone who retired last month. There is even the possibility of back pay, however, it can only be extended back to the effective dates of the laws, which are June 1, 2003 for those with 20 years of service, or January 1, 2008, for those who were medically retired under Chapter 61 with less than 20 years of service.

You must apply with your branch of service. Concurrent Receipt is automatically applied by DFAS and the VA. However, the CRSC program is administered by each branch of the military. You will need to complete an application and send in supporting documentation to receive this benefit.

There is a lot more to this law, so I suggest further reading if you believe it may apply to you.

Will Concurrent Receipt Be Extended to Everyone?

In a perfect world, all military retirees who have a VA service-connected disability rating would be eligible to receive the disability pay in addition to their retirement pay. Unfortunately, the government budget isn’t limitless and the current payment methods are being used to help control budgets. Concurrent Receipt was phased in over a ten year period, with veterans receiving incrementally larger amounts of VA compensation added to their retirement pay each year. If the government were to open Concurrent Receipt to everyone, they would likely do something similar, as it would otherwise be a massive budget increase.

Will Concurrent Receipt Laws Change? There are many military organizations and lobbying groups that are working hard to get the Concurrent Receipt laws extended to all retirees, regardless of their disability rating. But it has yet to be approved by Congress. The Military Officer’s Association of America (MOAA) has repeatedly attempted to get the law repealed that requires military retirees to forfeit their military retirement pay in order to receive their VA disability pay. You can read about their most recent efforts here.

Do you think Concurrent Receipt should be extended to all military retirees? Leave us a comment below and tell us why.