My VA claim was finally settled a month ago after about two years of waiting. I know it was settled because the VA sent me a very nice letter saying that it was, and along with my final disability rating came a brief paragraph that indicated that I would be receiving a settlement check from both the Defense Finance and Accounting Service (DFAS) as well as the VA. Intriguing, thought I. What exactly did that mean, and more importantly for my bank account, how much money were we talking about?
The way that the system is supposed to work is that you receive any compensation related to your disability rating beginning the day after you leave the military. That payment is supposed to come directly from the VA, and DFAS should have nothing to do with it. Except for a couple of cases…
In my case, I received no VA compensation until my case was partially adjudicated some ten months after the claim was filed. During that time I was receiving my full military pension.
On the tenth month of the life of my disability claim the VA made a partial determination in my case. They rated me at a low level for a few conditions, but they needed to conduct more examinations to determine if I was eligible for a higher rating. The bottom line was that now I was eligible to receive some compensation from the VA.
The devil is always in the details, however, and instead of receiving a check on top of my pension the military deducted the amount of my VA compensation from my pension. The VA then did send me a check, but for the same amount that was deducted from my pension. Pretty much a zero sum game, except that the VA compensation is tax free. Here is an explanation of how it works from a previous post:
Let’s say that you receive a disability rating that results in a payment from the VA of $100. That $100 is not added to your check for a total of $1600. Instead, $100 of the $1500 that was paid by the Defense Finance and Accounting Service (DFAS) is now paid by the VA, so the total pension amount stays the same. What changes is how the taxes are computed.
Now you have $1400 that is taxable, which results in a slightly lower tax bill. Here is the math:
$1400 x 20% = $280 in taxes.
$1400 (from DFAS) + $100 (from the VA) = $1500 (which is your pension amount).
$1500 (pension + VA Disability) – $280 (taxes) = $1220.
Sooooo…..as a retiree you get an extra twenty bucks in your monthly check. If you are not a retiree, however, you get the full $100.
In my case, I received the partial claim amount until my claim was settled a whole year later. Now I became eligible for not only the full VA compensation amount, but also a check that amounts to all of the compensation that I would have been paid had my claim been settled the day I left active duty. In other words, the VA would write me a check for the full amount of compensation I was eligible for, minus the money that I had already received. Here is an example of how that works (following the previous example):
To keep things simple, I will use $100 as the partial claim compensation amount and $200 as the final compensation amount. My claim took 22 months to complete, with a partial settlement issued at month ten. The math looks like this:
Total amount of VA compensation that the veteran should receive in this case is computed by multiplying the number of months eligible times the final compensation amount, as follows: $200 x 22 = $4400.
The amount of VA compensation that the veteran has received to this point is computed by subtracting the number of months he or she received compensation from the total months eligible, and then multiplying that number by the partial settlement compensation amount, as follows: 22 – 10 = 12 months: 12 x $100 = $1200.
Now that we know how much the total amount of compensation the veteran is eligible for ($4400) and the amount of compensation that he or she has already received ($1000), we can determine the settlement amount from the VA by subtracting the amount received from the total amount: $4400 – $1200 = $3200.
So the veteran will receive a tax free check for $3200. Sweet!
But wait, there’s more…
For those veterans who are retired from the military, they are owed the same back pay as shown above, but in addition DFAS is required to pay back the taxes collected on the back pay. For every month that you should have received a payment from the VA but didn’t, that amount was taxed. Since VA compensation is tax free, you are due the taxes that you paid. It is calculated as follows:
From the problem above, you are about to receive a check for $3200 from the VA. DFAS has already deducted the taxes for the first $1200, but has not done so for the remaining $3200. In effect, you have been paid that amount and been taxed on it, so DFAS needs to cut you a check for the taxes (assuming a 20% tax rate as used in the problem above): $3200 x 20% = $640. Unfortunately, since you are retired and not simply out of the service you don’t get $3200. You get $640. Not as sweet, but still a nice chunk of change.
But wait, there is still more!
In cases where your disability compensation rating is 50% or more, you are eligible for Concurrent Receipt of VA Compensation and Retired Pay through a program known as CRDP (Concurrent Retirement and Disability Pay — to learn more about the nuts and bolts of the program follow this link). Concurrent receipt means that you receive checks from both DFAS and the VA, and that you are entitled to the full amount of eligibility from both. Now the numbers are quite different when you calculate them using the numbers above:
Since you are eligible to receive both checks, you will receive your full settlement check from the VA as well as back pay for the pension amount that was deducted and replaced by the monthly VA claim amount, less taxes on that amount. Sounds complicated, but it really isn’t. The math looks like this: (Full VA settlement amount) $3200 + (Pension amount deducted and replaced by the VA) $1200 – (taxes on the pension amount deducted and replaced by the VA) $640 = $3760.
If your brain hurts, that’s ok. The bottom line is that the DFAS and the VA are sending you a check that will cover the cost of whole lot of aspirin.