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Rob,

It was a court decision that basically says that VA disability payments are non-taxable--but we knew that. The problem comes when you receive a retroactive award for a disability. Since your disability pay offsets, in varying degrees, your retired pay, the VA does not actually send you the back pay if you have already received it as part (or all) of your retired pay, which is taxable income. Unfortunately, the retired pay folks will not correct their report of taxable income they have porvided you (and the IRS). When this happens you are entitled to an adjustment in the amount of taxable income that is reported for you. It can even carry back into years (up to three) for which you have already filed and paid taxes.

Look through the past posts and you will find quite a full explanation of it. I think the text on the court decision is even covered.