Military Severance Pay Compensation Armed Forces

By | January 26, 2014

When is Military Severance Pay Taxable?

The general rule is that military separation payments are taxable in the year you receive them. Like military retirement pay, military separation benefits don’t represent a return of contributions of previously taxed income contributed by you to a retirement plan. As a result, you must include the entire amount received in income.


Military Severance Pay Compensation Armed Forces

Armed Forces members who have been separated from active duty for years of service or medical reasons are given severance payments, which are taxable as wages. If the member receives disability severance pay and is later awarded Veterans Affairs (VA) disability benefits, 100% of the disability severance benefit may be excluded from income. This process takes several months and sometimes years. Until the VA makes the determination and sends the discharged Armed Forces member a letter of determination, the Armed Forces member will receive the total “pension,” which is taxable.

There are no special provisions that allow separation pay to be averaged over a number of years or rolled over into an IRA.

Many other types of military benefits are tax-free. These include annual round-trips for dependent students and many other travel allowances, burial and death services, combat zone compensation, certain disability benefits and educational assistance, moving and storage payments, and VA benefits.


To be entitled to disability severance pay, the Soldier’s unfitting disability must meet the criteria below.

  • The disability is permanent or may be permanent.  Unlike the criteria for permanent disability retirement or placement on the Temporary Disability Retirement List (TDRL), whether the disability is stable is not a consideration.
  • For Soldiers serving on active duty under an order to active duty of more than 30 days, the disability must be incurred while the Soldier was entitled to basic pay, or incurred while the Soldier was in an excess leave status due to an emergency reason, or incurred due to an authorized absence to participate in an educational program.
  • The disability is not the result of the member’s intentional misconduct or willful neglect and was not incurred during a period of unauthorized absence.