Chapter 61 retirees with a combat-related determination are entitled to tax-free retired pay — no CRSC required. DFAS and some PPC personnel have been getting this wrong. Here is the regulation that sets them straight.
Taxability of Combat-Related Military Retired Pay
This post is for those of you who have been medically retired under Chapter 61 and received a "V" Code from the Army PEB — or its equivalent combat-related determination from the Air Force, Coast Guard, or Navy PEB.
A troubling pattern has emerged recently: DFAS and Coast Guard PPC personnel have been telling Chapter 61 retirees with combat-related determinations that their retired pay is not tax-free unless they are receiving CRSC. That is incorrect — and it is costing veterans money they are legally entitled to keep.
What the Regulation Actually Says
The governing authority on this issue is Section 2.2.3 of Chapter 24, Volume 7B of DoD 7000.14-R (the Financial Management Regulation), which addresses the computation of wages subject to Federal Income Tax Withholding (FITW). It states:
"2.2 Not Subject to FITW — The gross retired pay of a member may not be subject to FITW if the member is on the Temporary Disability Retired List (TDRL) or Permanent Disability Retired List (PDRL), receiving disability retired pay, and if:
2.2.3. The member is receiving disability retired pay because of a combat-related injury. The term 'combat-related injury' means personal injury or sickness incurred as a direct result of armed conflict, or while engaged in extra hazardous service, or under conditions simulating war, or caused by an instrument of war. See DoD Instruction (DoDI) 1332.18, Disability Evaluation System (DES)."
The regulation is unambiguous. A Chapter 61 retiree on the TDRL or PDRL who is receiving disability retired pay because of a combat-related injury is not subject to federal income tax withholding on that pay. CRSC is a separate program — it is not a prerequisite for this tax exemption.
What to Do If DFAS Is Withholding Incorrectly
If DFAS or Coast Guard PPC personnel have told you that your retired pay is taxable because you are not receiving CRSC, refer them directly to DoD 7000.14-R, Volume 7B, Chapter 24, Section 2.2.3. Cite the regulation by name and section number. In Attorney Gately's experience, having the specific regulatory citation in hand is often enough to resolve the issue.
If the problem persists, contact Attorney Gately's office. This is a straightforward regulatory compliance issue — and one that should not require extended back-and-forth with a pay center to resolve.
For more on how CRSC and CRDP interact with your retired pay, see our post on CRSC vs. CRDP: which is better for you. If you are applying for CRSC for the first time, our CRSC application guide walks through the process step by step. You can also use our CRSC calculator to estimate your potential monthly benefit.
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Written by
John B. Gately, Attorney & Counselor at Law
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