Is Combat-Related Special Compensation (CRSC) Taxable?
Clarify the distinct tax treatment of Combat-Related Special Compensation, a key detail for military retirees to accurately file and manage their income.
Combat-Related Special Compensation (CRSC) is a monthly payment that restores military retired pay for retirees with combat-connected disabilities. Federal law requires that a retiree’s retirement pay be reduced by the amount of VA disability benefits they receive. CRSC reimburses eligible retirees for this reduction for any disabilities deemed combat-related.
To qualify, a veteran must be entitled to military retired pay, have a VA disability rating of at least 10 percent, and have their retirement pay reduced by their VA pay. The disability must result from armed conflict, hazardous duty, an instrumentality of war, or activities simulating war. An application must be filed with the veteran’s branch of service for a combat-related determination.
Federal Tax Treatment of CRSC
Combat-Related Special Compensation is not subject to federal income tax. The Internal Revenue Service (IRS) considers CRSC payments to be compensation for injuries or sickness resulting from active service, distinguishing it from a standard military pension.
This tax-exempt status is outlined in IRS Publication 525, “Taxable and Nontaxable Income.” The guidance specifies that payments for combat-related injuries are not included in gross income. Therefore, recipients do not need to report CRSC payments as taxable income on their federal tax returns.
State Tax Treatment of CRSC
Because CRSC is not taxable at the federal level, it is generally not taxed by state governments. Most states use the federal Adjusted Gross Income (AGI) as the starting point for their income tax calculations. Since CRSC payments are excluded from federal AGI, they do not flow through to the state tax return to be taxed.
However, it is advisable for retirees to verify the specific tax laws in their state of residence. While the majority of states follow the federal treatment of military disability payments, state tax codes can have unique provisions.
Distinguishing CRSC from Other Military Retirement Pay
It is important to distinguish CRSC from other forms of retirement pay with different tax implications. Standard military retirement pay, based on years of service, is considered taxable income by the federal government and must be included in the recipient’s gross income.
Another payment is Concurrent Retirement and Disability Pay (CRDP). This program also allows some retirees to receive both military retirement pay and VA disability pay without the traditional offset. Unlike CRSC, payments under the CRDP program are generally taxable as they are a restoration of retirement pay, not separate disability compensation.
Retirees eligible for both CRSC and CRDP must choose which benefit to receive each year. The tax implications are a significant factor in this decision, as CRSC is non-taxable while CRDP is taxable.
Correcting Tax Reporting Errors
Occasionally, the taxable amount reported on a retiree’s Form 1099-R from the Defense Finance and Accounting Service (DFAS) may incorrectly include non-taxable CRSC payments. This error can lead to an overpayment of federal and state income taxes.
To identify an error, review the DFAS Retiree Account Statement (RAS). This monthly statement breaks down pay components, separating standard retirement pay from CRSC amounts. A discrepancy can be spotted by comparing the total CRSC received for the year on the RAS with the taxable income on the 1099-R.
If the Form 1099-R is inaccurate, the retiree should contact DFAS to request a corrected form. For some retroactive CRSC awards, DFAS may not issue corrected forms for prior years. In these instances, the retiree may need to file an amended return to claim a refund for taxes overpaid on the non-taxable CRSC income.