2 × Monthly Basic Pay × Years of Service. Max 19 years credited. Min 12 months of basic pay. 6+ mo rounds up. Computed at current basic pay (not high-3).

Is severance taxable?

Non-combat: taxable with 22% supplemental withholding. Combat-related: TAX-FREE under 26 USC § 104(a)(4). PEB makes the combat-related determination.

Non-combat: VA pay reduced to $0 until severance recouped (38 USC § 5304(c)). Combat-related: NOT recouped under 10 USC § 1212(d). Keep both.

Can I claim past tax refund?

Yes — PL 114-292 (2016) allows refund of taxes paid on combat-related severance 1991-2017. Simplified: $1,750-$3,200; or itemize via Form 1040-X.

Disability Severance Pay Calculator

When you get severance vs. retirement

Chapter 61 medical separations under Title 10 § 1201-1212 break into two outcomes based on your years of service and disability rating at the time of separation:

Disability RETIREMENT (10 U.S.C. § 1201 / § 1202): If you have 20+ years of service OR a disability rating of 30%+, you are medically RETIRED. You receive monthly retired pay for life (calculated as the greater of YOS × 2.5% × high-3 OR disability rating × high-3). You're eligible for TRICARE retiree health benefits and SBP election.
Disability SEVERANCE (10 U.S.C. § 1212): If you have less than 20 years of service AND a disability rating below 30%, you receive a one-time LUMP-SUM payment. No monthly pay. No retiree TRICARE — you transition to civilian healthcare. May qualify for VA compensation separately.

The 30% threshold matters enormously. A member at 20% rating gets severance only; same member at 30% gets monthly retired pay for life. Push your PEB hard to document every condition that contributes to the rating.

The severance pay formula

Per 10 U.S.C. § 1212:

Severance = 2 × Monthly Basic Pay × Years of Service

Years cap: Maximum 19 years credited (since 20+ qualifies for retirement). Maximum severance therefore = 2 × monthly basic pay × 19 = 38 months of basic pay.
Minimum: 12 months of basic pay (for members with less than 6 years of service).
Year rounding: 6+ months counts as a full year (round up). 5 yrs 7 mo = 6 years credited.
Basic pay used: Your current basic pay rate at separation (NOT high-3).

Example: E-6 with 8 years TIS, $3,800 basic pay, 20% non-combat rating: 2 × $3,800 × 8 = $60,800 severance (taxable). After 22% federal withholding ≈ $47,400 net. Then 14 months of VA disability recouped before VA payments resume.

Combat-related = tax-free AND no VA recoupment

26 U.S.C. § 104(a)(4) excludes from gross income any amount received as a pension, annuity, or similar allowance for personal injuries or sickness resulting from active service in the armed forces. The IRS has interpreted this to include disability severance pay where the disability resulted from "combat-related" activity:

Armed Conflict (active war/combat operations)
Hazardous Duty (parachute, demolition, etc.)
Instrumentality of War (weapons, military vehicles in combat configuration)
Simulated War (training exercise replicating combat conditions, including live-fire exercises)

VA recoupment exemption: Under 10 U.S.C. § 1212(d), combat-related disability severance is NOT recouped by the VA. The member keeps BOTH the severance AND their full monthly VA disability compensation from day one.

Documenting combat-relatedness: Your Physical Evaluation Board (PEB) makes the initial combat-related determination. Push hard for it. If denied at PEB but evidence exists, you can appeal through the Physical Disability Board of Review (PDBR) or BCMR/BCNR after separation.

Combat-Injured Veterans Tax Fairness Act of 2016

Public Law 114-292 (signed December 16, 2016) allows veterans who were taxed on combat-related disability severance pay between 1991 and 2017 to file a one-time refund claim with the IRS, regardless of normal statute of limitations.

How to claim:

Receive notice letter from DoD (DoD identified ~133,000 eligible veterans and mailed letters starting July 2018)
Or, if you didn't get a letter but think you qualify, send a written claim to IRS
File Form 1040-X (amended return) for the year of separation, OR use the simplified flat-amount method

Simplified flat-amount refund (per IRS Notice 2018-37):

Separated 1991-2005: $1,750 refund
Separated 2006-2010: $2,400 refund
Separated 2011-2017: $3,200 refund

Itemized refund (potentially much more): Calculate exact federal tax paid on the original severance, file Form 1040-X amended return claiming refund. Usually requires the original W-2 / 1099-R from the separation year.

VA disability while recouping severance

For non-combat severance, the VA reduces your monthly compensation by the full amount of your VA award (down to $0) until the severance is fully "paid back." Mechanism:

You receive severance from DoD on separation day (or shortly after).
You apply for VA disability for the same condition that triggered severance.
VA approves your rating — let's say 30% with monthly comp of $542.
VA starts paying $0 monthly (your $542 award is withheld) until cumulative withholding equals severance.
For a $40,000 severance at $542/mo VA, that's 74 months ≈ 6.2 years of $0 VA payments.
After recoupment ends, you receive your full $542/mo VA compensation going forward.

VA rating after severance still helps: Even during recoupment, your VA rating gives you access to VA healthcare, vocational rehabilitation, and other non-monetary benefits. And once recouped, the monthly compensation flows tax-free for life.

What to do at your PEB / MEB

Document EVERY condition. Multiple smaller conditions can combine via VA math (38 CFR § 4.25) to push you over 30% — qualifying you for retirement instead of severance. A few additional 10% conditions can be the difference between $50k severance and $1.5M lifetime retirement.
Push for combat-related classification. Even if your disability isn't from active combat, training injuries in "simulated war" conditions (live-fire exercises, parachute operations, etc.) may qualify under "Instrumentality of War."
File for VA disability BEFORE separation via the BDD program (180-90 days pre-separation). This preserves your effective date and reduces the gap before benefits start.
Consider Concurrent Receipt eligibility. If you end up at 50%+ VA rating AND 20+ YOS (rare with severance but possible later via VA rating increases), you become CRDP/CRSC eligible.
If denied combat-related at PEB, file with PDBR (Physical Disability Board of Review) post-separation. PDBR can reverse PEB findings and restore combat-related status.

Disability severance — frequently asked questions

Who gets disability severance vs disability retirement?

Disability severance (10 U.S.C. § 1212): less than 20 years of service AND less than 30% disability rating = one-time lump sum. Disability retirement (10 U.S.C. §§ 1201/1202): 20+ years of service OR 30%+ disability rating = monthly retired pay for life with TRICARE retiree benefits.

What is the disability severance formula?

Severance = 2 × Monthly Basic Pay × Years of Service. Maximum 19 years credited (since 20+ would qualify for retirement). 6+ months rounds up to next year. Minimum is 12 months of basic pay for short-service members. Example: E-6 with 8 years at $3,800 basic pay = 2 × $3,800 × 8 = $60,800 lump sum.

Is disability severance taxable?

Non-combat-related severance is TAXABLE as ordinary income with 22% federal supplemental withholding. Combat-related severance is FULLY TAX-FREE under 26 U.S.C. § 104(a)(4). The combat-related determination is made by your service Physical Evaluation Board (PEB) at separation.

Does VA recoup my severance from disability compensation?

Yes for non-combat severance — under 38 U.S.C. § 5304(c), VA reduces your monthly compensation to $0 until the severance amount is fully recouped. For combat-related severance under 10 USC § 1212(d), VA does NOT recoup. You receive both severance and full VA compensation from day one.

How do I qualify for combat-related severance?

The disability must result from: Armed Conflict (active combat operations), Hazardous Duty (parachute, demolition, etc.), Instrumentality of War (weapons or military vehicles in combat configuration), or Simulated War (training exercises replicating combat, including live-fire). Push hard at your PEB for combat-related classification — appeal via PDBR if denied.

Can I claim a tax refund on past severance?

Yes — Combat-Injured Veterans Tax Fairness Act of 2016 (PL 114-292) allows refund claims for combat-related severance taxed between 1991-2017, with no statute of limitations. Simplified refund: $1,750 for 1991-2005, $2,400 for 2006-2010, $3,200 for 2011-2017. Or itemize via Form 1040-X for potentially higher amount.

What if my PEB rates me at 20% but I have multiple conditions?

Push for documentation of EVERY condition. Multiple 10% conditions can combine via VA math (38 CFR § 4.25) to push you over 30%, qualifying for retirement instead of severance. A few additional findings can be the difference between $50k severance and $1.5M lifetime retired pay. Get a private medical evaluation if needed.

Should I file VA disability before separation?

Yes — file under BDD (Benefits Delivery at Discharge) 180-90 days before separation. BDD claims process in 60-120 days and retroactive pay flows back to your separation date. Combined with separation severance recoupment, BDD ensures the recoupment clock starts ticking immediately.

Disability Severance Pay