Author: John Cooney, CFP®, EA

Categories
Disability Pay Reserve Component Taxes

What is Concurrent Retirement and Disability Pay?

Concurrent Retirement and Disability Pay

Understanding Concurrent Retirement and Disability Pay

If you are currently serving in the military and receiving disability pay, you are probably familiar with the fact that you cannot receive your disability payment for time you are being paid for military service.  What you may not know, is that this regulation is also applied when you receive your military pension, as the law states that you cannot receive military retired pay and VA compensation at the same time.
There is an exception to this, as in 2004, the Concurrent Retirement and Disability Program (CRDP) was put into place.  In this article we will talk about what CRDP is, who qualifies, and go through some examples to help explain the program.  We will also discuss Combat Related Special Compensation; what it is, how it relates to CRDP, and how to choose when you qualify for both.

Who Qualifies for CRDP?

You are eligible for CRDP if:

  • You are a regular retiree, with a VA Disability rating of 50% or higher, or
  • You are a Reserve retiree with 20 or more qualifying years of service, have a VA Disability rating of 50% or higher, and have reached retirement age, or
  • You retired under the Temporary Early Retirement Act (TERA) with a VA Disability rating of 50% or higher, or
  • You are a disability retiree who earned entitlement to retired pay under any provision of the law other than solely by disability and you have a VA Disability rating of 50% or higher.

Do I Need To Apply For CRDP?

No, no application is necessary, if you fall into one of the categories we discussed above, you will automatically be enrolled.

How Does CRDP Work?

CRDP is a restoration of your retired pay that was not paid to you because you received Disability Pay.  Let’s look at an example.
SFC Smith is a retiree that receives $2,000 per month in retired pay and $142 per month in disability pay.  She has a 10% disability rating from the VA.  SFC Smith’s monthly payments will look like this:

  • Disability pay $142 (non-taxable)
  • Retirement Pay – $1,858 (taxable, her $2,000 retirement pay is reduced by the amount of her disability payment)
  • Total Monthly Payment – $2,000

That is how it worked prior to CRDP, and how it still works for anyone receiving disability pay with a rating less than 50%.
Now, let’s make SFC Smith’s disability rating 60%, with a monthly disability payment of $1,131.  Since SFC Smith is a regular retiree and has a disability rating greater than 50%, she will receive CRDP.   SFC Smith’s payments will look like this:

  • Disability pay $1,131 (non-taxable)
  • Retirement Pay – $869 (taxable, her $2,000 retirement pay is reduced by the amount of her disability payment)
  • CRDP – $1,131 (taxable, restores her retirement pay withheld)
  • Total Monthly Payment – $3,131

As you can see, a pretty nice benefit, that can really add up over years of payments for those that qualify.  For CRDP recipients, they will receive two payments per month; their retirement pay which will include the CRDP amount and the disability payment.

Is CRDP the Same Thing as Combat Related Special Compensation?

No, Combat Related Special Compensation (CRSC) is a separate program from CRDP.  While CRDP is a restoration of retirement pay withheld, CRSC is an entitlement that you are paid, thus reimbursing you for all or a part of the retired pay withheld.  Since it is not considered retirement pay, CRSC is non-taxable.

CRSC Eligibility

To be eligible for CRSC you must:

  • Be entitled to and or receiving military retired pay
  • Be rated at least 10% by the VA
  • Waive your VA pay from your retired pay
  • File a CRSC application with your branch of service

Some pretty big differences here between CRDP and CRSC.  First, the disability rating is lowered from 50% to 10%, however, the disability must be related to combat service.  Secondly, while CRDP will be automatically paid if you are eligible, you must apply for CRSC.  You apply for CRSC on DD Form 2860, which is sent to the specific branch of service that you were in.  Documents you will need to complete the 2860 include your DD-214, VA Determination Letter, Medical Records, and Orders.

How Does CRSC Work?

SFC Smith is a military retiree who receives $2,000/month in retired pay.  As a 20% rated disability recipient, SFC Smith also receives $281 in monthly disability payments.  SFC Smith applied for and receives CRSC and 100% of her disability rating is directly related to combat.  Here is a breakdown of the payments SFC Smith will receive:

  • Retirement Pay – $1,719 (taxable, her $2,000 retirement pay less her $281 disability pay)
  • Disability Payment – $281 (non-taxable)
  • CRSC Payment – $281 (non-taxable)
  • Total Monthly Payment – $2,281 ($1,719 taxable and $562 non-taxable)

In this example, 100% of SFC Smith’s disability was determined to be combat-related.  Let’s also look at an example where that isn’t the case.
SFC Smith is a military retiree who receives $2,000/month in retired pay.  As a 20% rated disability recipient, SFC Smith also receives $281 in monthly disability payments.  SFC Smith applied for and receives CRSC and 50% of her disability rating was determined to be directly related to combat.  Here is a breakdown of the payments SFC Smith will receive:

  • Retirement Pay – $1,719 (taxable, her $2,000 retirement pay less her $281 disability pay)
  • Disability Payment – $281 (non-taxable)
  • CRSC Payment – $140.50 (non-taxable)
  • Total Monthly Payment – $2,140.50 ($1,719 taxable and $421.50 non-taxable)

As the example shows, CRSC will only compensate you for the portion of the retirement pay you waived in order to receive disability payments that were determined to be combat-related.

If You Qualify For Both, Which Should You Choose?

If you qualify for both CRSC and CRDP, DFAS will pay you the amount that will result in a higher monthly payment in the initial year you qualify, which will remain the case until the first CRDP/CRSC Open Season.  During the Open Season, DFAS will mail you an election form where you can choose to receive either CRDP or CRSC.  During subsequent years, you will not receive an election form.  You can still change your choice during the Open Season, but you will need to request the change yourself.
There are two big factors you should consider when choosing whether to receive CRDP or CRSC.

What Percentage of Your Disability is Combat Related?

CRDP will pay 100% of your retirement pay withheld, while CRSC will only pay the percentage related to combat disabilities.  Where this factor really comes into play is if your disability rating changes over time.  For example, let’s say you are rated 50% by the VA and 100% of that rating is combat-related, CRSC will pay 100%, so you elect CRSC.  Five years go by and you file a new claim with the VA for a non-combat rated disability and get assessed as 70%.  Now, you may be receiving only 71% of your withheld retirement pay through CRSC, where CRDP would pay 100%.  It may be more beneficial for you to elect the change.

Taxes, Taxes, Taxes

As with most financial decisions, we have to factor in the effect of taxes.  CRDP is taxable, while CRSC is non-taxable.  This could lead to scenarios where electing CRDP may give you a higher monthly payment, but because it adds to your taxable income, you may be better off electing to receive the non-taxable amount provided by CRSC.
Now that you have a better understanding of CRDP and CRSC, there are multiple variables at play.  As you can see, the decision may not always be black and white.  Working with a member of the Military Financial Advisors Association, who understands the VA and military financial system can help to walk you through your options and recommend the one best suited for you.

Do you have questions or wonder whether CRDP or CRSC is the better option for your situation? Contact one of our advisors to get your free consultation!

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Categories
Reserve Component Taxes

Deducting Reserve Expenses

Understanding when you can deduct Reserve expenses

While for many of our National Guard and Reserve servicemembers, traveling to monthly Battle Assemblies right now is not an option, we do hope that in the near future we will be back to meeting together, in-person, as a unit. When the stop order movement is lifted, it is important that all servicemembers are aware of the tax rules around being able to deduct your out of pocket expenses for travelling to drill.

What is the Regulation?

The Tax Cuts and Jobs Act, which passed in 2017, suspended the ability of taxpayers to claim miscellaneous itemized deductions that exceed 2% of their Adjusted Gross Income, which included work expenses. However, the law still allows those tax-payers that fall into four categories to continue to deduct their expenses; Armed Forces reservists, qualified performing artists, fee-basis state and local government employees, and employees with impairment-related work expenses. In this article, we will focus on the Armed Forces Reservists; who qualifies, what expenses they can claim, and how to claim them on your tax return. We will also give some tips on how to best track your expenses throughout the year to make it easier on you come tax time.

What Service Members Can Claim the Expense Deduction?

Not all service members can claim the expense deduction, to qualify the Soldier must meet a couple tests; all of these questions must be a “yes” in order for you to claim your expenses.
  • Test 1: Were you employed as an Armed Forces Reservist who traveled more than 100 miles from your tax home to complete Reserve related duty? (For IRS purposes, a Reservist is a member of the Military Reserves, National Guard, or Public Health Service)
  • Test 2: Did you have job-related business expenses?
  • Test 3: Are your deductible expenses more than the total of your reimbursements for those expenses?
  • If you can answer yes to all three of these questions, then you are eligible to claim your expenses on your tax return.

What Expenses Can You Claim?

Vehicle Expenses
  • If you regularly drive over 100 miles to your Battle Assembly, you can claim vehicle expenses
  • The rate you can claim (For 2019) is 58 cents per mile driven
  • For example, if your Reserve Center is 100 miles away from your tax home, each month that you drive to your duty would create a deductible expense of $116
    • 100 miles times .58 = $58
    • $58 X 2 (round trip) = $116
  • Alternatively, instead of claiming the miles, you do have the option to claim actual expenses
  • Under actual expenses, you will keep detailed track of your auto related expenses such as gas, oil, repairs, insurance and then multiply this total amount by the percentage of miles driven for reserve duty versus non-reserved duty throughout the year
    • For example, if you spent a total of $5,000 on vehicle expenses and the percentage of overall miles driven for reserve duty versus all miles driven is 1%, you could claim $50 as vehicle expenses for the year
    • $5,000 times 1% = $50
  • It is important to note that if you are using the standard mileage rate, you must do so in the first year you use the vehicle for reserve travel, you can always switch to the actual expense method in later years
Parking Fees, Tolls, and Transportation that didn’t Involve Overnight Travel
  • If you drove to and from military duty on the same day without staying overnight, you can deduct parking fees, tolls, and transportation costs, to include train, bus, etc.
Travel Expenses for Overnight Stays
  • These expenses include lodging, airfare, car rental, etc.
  • Do not include meals in this category
  • You can include incidental expenses, which covers items such as fees and tips; instead of tracking actual incidental expenses, you can use the alternate method of $5/day, but you can only use this alternate method if you are claiming no meal expenses for the same day
Meals
  • You can deduct meal expenses for travel that keeps you away from your tax home overnight
  • You can use actual expenses or claim the standard meal allowance, which for most locations is $51/day, but may change based on the specific location of duty
  • Even if you are using the standard allowance, you still must keep records showing the time, place, and purpose of your travel
  • For deduction purposes, you will be able to claim 50% of expenses related to qualified meals

How Do You Claim the Deduction?

  • To claim the expenses on your tax return, you will need to file IRS Form 2106 with your return
  • You will use Form 2106 to report your expenses, reimbursements, and to calculate the total amount you can deduct
  • Once you or your tax preparer have completed Form 2106, it will give you a value that you can ultimately transfer to your 1040, reducing your tax liability for the year
Best Practices
  • Trying to figure out your expenses for the previous year when you do your taxes will be a time consuming and frustrating experience
  • To make this easy, you must build a process for tracking these expenses as you incur them, to help with this, I’ve shared a tracker that you can easily update and adapt to fit your specific needs here
  • Document, document, document…keep your receipts, they are your way of proving to the IRS that you incurred them and that you are accurately reflecting them on your return
  • Don’t confuse the tax deduction with your Inactive Duty Training (IDT) Travel reimbursement, they are two separate things, with two separate rules and regulations
    • For example, the mileage rate you can claim and be reimbursed for on your IDT local voucher is 17 cents per mile, in contrast with the 58 cents per mile you can claim on Form 2106
  • You can’t “double-dip!” If the military reimburses you for those expenses, keep track of that as well as you will need to report the reimbursements on Form 2106

Deducting Reserve Expenses Example

CPT Smith is a US Army Reservist, who lives in Boston, MA but is assigned to a unit that is based in Fort Dix, NJ.  He passes all three tests, allowing him to be able to deduct his reserve travel related expenses; his specific expenses are below for 2019.
Expense Category Raw Numbers Total Expense Reimbursed Amount Unreimbursed Expense
Vehicle 5000 miles drive $2,900 (.58/mile) $2,900 $0
Transportation (non-overnight) N/A $0 $0 $0
Overnight Travel Costs $1,400 $1,400 $800 $600
Meals $750 $750 $300 $225 (1/2($750-300)
Total $4,675 $4,000 $825
As you can see from this example Form 2106, CPT Smith would be able to claim a $825 deduction on his 2019 return based on his reserve related travel expenses. Being a citizen Soldier isn’t easy and you have to make many sacrifices to continue serving, so at the same time you owe it to yourself to use the tax code to help ease some of the financial burden you incur in your service.  While this may seem daunting to track and calculate all of this, in the end it can pay off, but don’t feel you have to do it alone.  We make it our mission here to understand those tax issues that specifically affect members of our military so that we can best serve you.  If you have questions about reserve related travel expenses or any other military finance related issue, do not hesitate to contact me or any of the financial advisors that belong to the Military Financial Advisors Association.

Do you have questions about your reserve pay expense deductibility? Contact one of our advisors for a free consultation!

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