The statement below is from the VFW’s 13 July Action Corps Weekly. In the event this situation may applies to you, ensure you read the provided links for advice on how to proceed. It is not widely known a special law, which went into effect in 2017, was passed to help remedy the situation. However, it has taken the Defense Department until now to determine which veterans were affected and how much they overpaid.
Tax Glitch Affects Veterans: A recent Pentagon audit revealed that more than 130,000 veterans who were medically separated as a result of injuries sustained in combat, and received a disability severance, may be entitled to a significant tax refund. Under federal law, disability severance paid as a result of combat injuries is intended to be tax-free. However, from 1991 to 2016, the automated payment system maintained by DOD failed to properly identify those payments as being tax exempt and withheld between 20-25 percent of the payment, resulting in an overpayment of federal income tax. If you feel that you may be entitled to a refund, you can find more information including how to file an amended income tax return through the Internal Revenue Service.
Source: VFW Action Corps Weekly