Is CRDP Taxable? Federal and State Tax Rules
Learn how federal and state laws impact the taxability of your CRDP. This guide clarifies how your restored military retirement pay is treated for taxes.
Concurrent Retirement and Disability Pay (CRDP) allows certain military retirees to receive both their military retirement pay and Veterans Affairs (VA) disability compensation. Historically, retirees were required to waive a portion of their retirement pay, dollar for dollar, to receive VA disability payments, an offset rooted in law found in Title 38 of the U.S. Code.
The CRDP program, which began on January 1, 2004, provides an exception to this rule. To qualify, a retiree must have a VA disability rating of 50% or greater and be eligible for retired pay.
Federal Tax Treatment of CRDP
CRDP payments are considered taxable federal income. This is because CRDP is not a new type of payment but a restoration of the military retirement pay that was previously waived to receive VA disability compensation. Since military retirement pay is subject to federal income tax, the portion restored through CRDP is also taxable.
The Defense Finance and Accounting Service (DFAS), which manages these payments, taxes CRDP in the same manner as your regular retired pay. When you receive CRDP, the restored amount is added back to your gross retirement income, which increases your total taxable income for the year.
Taxability of Related Military Payments
The tax treatment for CRDP differs from other payments a retiree might receive. VA disability compensation benefits, administered by the Department of Veterans Affairs, are not taxable for federal income tax purposes and should not be reported as income.
Another program, Combat-Related Special Compensation (CRSC), also provides non-taxable payments. CRSC compensates for disabilities that are a direct result of armed conflict, hazardous duty, or training exercises. Unlike the automatic enrollment for CRDP, retirees must apply for CRSC.
A retiree who qualifies for both CRDP and CRSC cannot receive both and must choose one. While CRSC is tax-free, the payment may be lower if only some disabilities are combat-related. A retiree could receive a higher net payment from the taxable CRDP if their total disability rating is much higher than their combat-related rating.
State Income Tax Rules
The taxability of CRDP at the state level depends on the laws of the retiree’s state of residence. CRDP is treated as military retirement pay, so it is subject to the same state tax rules, and these rules vary widely.
States follow one of three approaches. Some states do not have an income tax, meaning CRDP is not taxed. Other states fully exempt all military retirement pay, including CRDP, from state income tax.
A third group of states offers partial exemptions or special tax treatment for military retirement income. These rules can be based on age, income, or a flat dollar amount. Retirees must consult their state’s department of revenue to understand how their CRDP payments will be treated.
Tax Reporting for CRDP
The Defense Finance and Accounting Service (DFAS) handles tax reporting for CRDP. Each year, DFAS issues Form 1099-R to retirees, which reports the total retirement pay distributed, including any CRDP payments.
On Form 1099-R, Box 1 shows the gross distribution, which is your standard retirement pay plus the amount restored through CRDP. Box 2a shows the taxable amount of the gross distribution. This is the figure you will use to report your pension income on your federal income tax return, Form 1040.