60. Taxable Income. Retired pay, based on length of service or age, is taxable. Persons retired for disability may elect to have retired pay computed on the basis of years of service, as provided by 10 USC 1401. That portion which is equal to the disability retirement pay to which a member would be entitled if his retirement pay were computed solely on the percentage of disability will be tax exempt; the balance will be taxable.

61. Withholding Tax Statement (TD Form W-2):

a. The Air Force Accounting and Finance Center computes and withholds Federal income tax if all or a portion of your retired pay is taxable. Each year, the center will send a withholding tax statement (TD Form W-2) to the address designated by you for correspondence purposes. This statement will show the amount of your retired pay that was subject to tax and the amount of taxes withheld for the calendar year. (TD Form W-2 will not be furnished if your retired pay is wholly tax exempt by reason of physical disability and you are not required to report this pay as taxable income).

b. If you have made an election under the Retired Serviceman's Family Protection Plan (RSFPP) the amount deducted for coverage under this plan will be included on your tax statement as income you received and from which tax was withheld.

c. Your withholding tax statement will not reflect credit for any "sickness" exclusion to which you may be entitled. You must claim this exclusion when filing your individual income tax return. A separate paragraph in this chapter has been devoted to "sick pay" exclusion.

62. Withholding Exemption Certificate (TD Form W-4). The amount of tax withheld from your retired pay is determined by the

number of exemptions which you claim on your Withholding Exemption Certificate (TD Form W-4). Once filed, a withholding exemption certificate will remain in effect until an amended certificate is furnished. Amended certificates should be filed within 10 days of any change in your exemption status. The following rules will assist you in determining the time to file amended certificates:

a. Decreased Exemptions:

(1) When you have been claiming exemption for a wife and become divorced or legally separated.

(2) When more than 50% of the support. of a dependent for whom you claim exemption is taken over by someone else.

(3) When a dependent (except a child under the age of 19 or student) for whom you are claiming exemption will receive $600 or more income of his own for the year. Other decreases in exemptions, such as death of a dependent, do not affect your withholding tax until the next year, but require the filing of a new certificate by the first of the year following the year in which the change occurred. b. Increased Exemptions:

(1) When you wish to claim an exemption for a wife who does not claim herself as an exemption on a separate certificate (for example, when a member marries or wife stops work).

(2) When a child is born or adopted. (3) When you begin to support a relative and expect to provide more than 50% of the relative's support.

(4) When you or your wife attain the age of 65 by the end of the year.

(5) If you or your wife become blind. 63. Income Tax Forms. Questions on accomplishing income tax forms and other related matters should be referred to an Internal Revenue Office, an Air Force Legal Assistance Officer, or to someone who provides professional tax service.

64. Disability Retired Pay:

a. If you were retired for disability, part or all of your retired pay will be exempt from Federal income taxation. The manner in which your retired pay is computed determines whether any of your pay is subject to the Federal income tax.

b. If you are receiving your retired pay computed by multiplying your percentage of disability times your basic pay, all of your retired pay will be exempt from Federal taxation. If you were retired for disability and chose to have your pay computed on the basis of length of service, then that amount of your retired pay is taxable which is in excess of the amount that you would have received if you had elected to have your pay computed on the basis of your percentage of disability.

c. If you retired for disability and received 75% of your basic monthly pay because you had service in World War I, the only portion exempt from Federal taxation would be the amount you would have received if your pay was computed solely on the basis of percentage of disability. The remainder of your pay will be taxable.

d. If you were placed on the temporary disability retired list, you have elected to have your pay computed either on length of service or on percentage of disability. In either case, you will receive not less than 50% of your basic monthly pay while you remain on the temporary disability retired list. If you elected to have your pay computed on length of service, only so much of your pay as you would have received had your pay been computed solely on the basis of disability will be tax exempt. If you elected to have your pay computed on percentage of disability, your entire pay will be exempt from Federal taxation, although your percentage of disability may be less than 50%.

e. Examples below illustrate Federal taxation of the pay of Air Force members retired for disability and subject to base pay rates established by Public Law 89-132, effective 1 September 1965:

(1) A lieutenant colonel with over 20 years of service was retired with a 60% disability. He elected to have his retired pay computed on the basis of his disability. His monthly retired pay is 60% $928.80 (active duty pay of a lieuten

ant colonel with over 20 years' service under the pay scale in effect 1 September 1965) or $557.28-all of which is exempt from Federal taxation.

(2) A lieutenant colonel with over 30 years of active service was retired with a 60% disability. He elected to have his retired pay computed on the basis of his length of service. His monthly retired pay is 22% ×30 years (75%) $961.50 (active duty pay of a lieutenant colonel with over 30 years' service under the pay scale in effect 1 September 1965) or $721.13. If his retired pay had been computed on the percentage of disability it would have been 60% $961.50 or $576.90. The difference between the two figures-$721.13 minus $576.90 or $144.23 per month-will be subject to Federal taxation.

f. The AFAFC determines the portion of your pay which is subject to Federal income taxation. Taxes are withheld from this taxable portion of your retired pay. The center makes the computation on the basis of your records and shows the portion of your pay which is taxable on your withholding tax statement (TD Form W-2). If you wish to challenge this figure, you should request the Center to make a recheck and, if necessary, correct your withholding tax statement.

65. "Sick Pay" Exclusion (Disability Retirement). A 1958 ruling by the Internal Revenue Service (RR 58-43) provided that, under certain conditions, up to $100 a week of the taxable portion of the pay of military members retired for disability incurred in active service may be excluded from Federal income taxation. as "sick pay" until the member reaches "retirement age." (Internal Revenue Code of 1954, Section 105(d).) Under current law the exclusion is limited to a weekly rate of $75 for the first 30 days, with a 7-day waiting period unless the member is hospitalized before attaining "retirement age," and $100 per week thereafter. To benefit from the recent ruling, you must meet the following conditions:

a. You Must Have Been Retired for Disability Incurred in Active Service. If you were retired for a reason other than disability, you are not entitled to exclude any portion of your retired pay under the ruling, even if you are

sick or injured during the year. Receipt of disability compensation from the Veterans Administration does not qualify you for the "sick pay" exclusion, if you were retired from the Air Force for a reason other than disability. The provisions of this ruling do not prevent you from using the sick pay exclusion on any income you receive from civilian employment should you be absent from that position due to illness. However, the amount claimed as sick pay exclusion may not exceed $5,200 annually. b. Your Retired Pay Must Be Partially Subject to Taxation. As explained previously in this series, retired pay computed by multiplying the percentage of disability times basic pay is totally exempt from Federal income taxation. If your retired pay is already totally tax exempt, you cannot, of course, benefit from "sick pay" exclusion. If, however, you were retired for disability but your pay is computed on the basis of length of service, the amount of retired pay in excess of the amount you would have received had you chosen to have your pay computed on the basis of percentage of disability is subject to taxation and will appear on your withholding tax statement (TD Form W-2). The Internal Revenue ruling allows up to $100 a week of the taxable portion of disability retired pay (the amount shown on your withholding tax statement) to be excluded from Federal taxation.

c. You Must Not Be Employed by the United States Government. You cannot be considered "absent from work" if you are employed by any agency or branch of the U.S. Government, including nonappropriated fund activities, or by a corporation the majority of whose stock is owned by the United States. If you are uncertain as to whether or not employment after retirement is within this category, you should request determination of status from your employer rather than from the Air Force or the Internal Revenue Service. The Internal Revenue Service has ruled by letter that claim for "sick pay" exclusion will not be disallowed solely because you are self-employed or employed by another.

d. You Must Not Have Reached "Retirement Age." You cannot be considered to be absent from work because of sickness or injury after

the date on which you would have been retired from service.

e. The "retirement ages" for retired Air Force personnel listed in the Internal Revenue Service ruling are as follows:

(1) Enlisted Personnel. The date they would have completed 30 years of service had they been retired for service, regardless of their age.

(2) Male Warrant Officers. The date they would have completed 30 years of service, or the date they would have attained age 62 with 20 years of service, whichever is earlier.

(3) Female Warrant Officers. The date they would have completed 30 years of service, or the date they would have attained age 55 with 20 years of service, whichever is earlier.

(4) Male Commissioned Officers. The date they would have completed 40 years' service, or the date they would have attained age 60, whichever is earlier. The exceptions to the age 60 are for major generals, who, at the time of their retirement for disability, have not reached age 62, the age factor is 62. For major generals, who at such time have reached 62 years and are serving in a temporary grade above major general, or in a position carrying such higher grade, the age factor is 64. For officers above the grade of major general, the age factor will be determined by individual rulings where necessary. For professors in the military and Air Force academies, the age factor is 64.

(5) Female Commissioned Officers (Lieutenant Colonel and Above). The date they would have completed 30 years of service.

(6) Female Commissioned Officers (Major Nurse Corps and Below). The date they would have completed 28 years of service.

(7) Female Commissioned Officers (Other Majors and Below). The date they would have completed 25 years of service.

The rules applicable to male commissioned officers are also applicable to female commissioned officers, who, at the time of their retirement, perform medical, dental, medical service, judge advocate, or chaplain functions under 10 USC 8067. All of the above "retirement ages" are based upon the retirement laws as they are contained in Title 10, USC.

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66. VA Compensation or Pension. If you are entitled to compensation or pension from the Veterans Administration, you may receive it by waiving all or part of your retired pay. Any Air Force retired member may waive all of his retired pay in favor of VA compensation or pension when the latter is the greater, or waive part of his retired pay to receive a like amount of compensation or pension from the VA.

a. Payment Received From the VA Is Tax Exempt.

(1) Mere entitlement to the payment will not result in any tax saving until a formal waiver of equivalent retired pay has been executed. By executing such a waiver, some retired members who are eligible to receive compensation or pension from the VA may effect a tax saving.

(2) If you were retired for length of service or age, all of your retired pay from the Air Force is subject to Federal income tax. Therefore, if you are eligible, it will benefit you to waive a part of your Air Force retired pay in favor of compensation from the VA which will be tax exempt.

(3) If you were retired for disability, you are less likely to effect a tax saving by waiving a part of your retired pay. In all probability, at least a portion of your Air Force retired pay is nontaxable and a waiver of retired pay in favor of VA pension or compensation applies first to the nontaxable portion of disability retired pay. A hypothetical case may help to make this clear.

(a) An airman entitled to basic pay of $318.60 a month subject to base pay rates established under Public Law 89-132, effective 1 September 1965, is retired with 24 years of service and receives $191.16 (212×24 years $318.60 basic pay) monthly retired pay. Since the airman was retired with a 40% disability, $127.44 (40% $318.60) of his monthly retired pay is tax exempt. In order to make certain that his disability is on record with the VA, the airman files a claim for disability compensation with them. The VA determines that the airman has a 40% service-connected disability incurred during wartime and, therefore, is compensable at the rate of $77 a month.

(b) The airman could waive $77 of his monthly retired pay and receive $77 monthly disability compensation from the VA. The $77 a month he received from the VA would be tax exempt. However, the $77 would be waived from the nontaxable portion of the airman's retired pay, leaving him $50.44 ($127.44 minus $77) nontaxable, Air Force retired pay. Therefore, the airman would effect no tax saving by waiving a portion of his retired pay in favor of disability compensation from the VA. 67. Retirement Income Credit:

a. As a retired member of the Armed Forces, you may be able to reduce your Federal income tax by taking advantage of the "retirement income" credit. This credit is available to persons presently receiving military retired pay who had an earned income in excess of $600 in each of any 10 calendar years before the taxable years in which the credit is claimed. "Earned income" is defined as wages, salaries, professional fees, and other compensation for personal services. As the name suggests, the retirement income credit is a credit against tax and not an exclusion or deduction from gross income. The maximum credit is equal to 17% of retirement income of $1,524 in 1964 and 15% for tax years beginning in 1965. This credit is diminished if the taxpayer receives certain other income, pensions or annuities in addition to retired pay, as will be explained.

b. Each retired member must compute his own tax credit on his income tax return (TD Form 1040-the "long" tax form). Computation of the credit is made on the appropriate income tax schedule used for "retirement income credit." The credit cannot be taken on TD Form 1040A, the "card" form income tax return. You compute the amount of retirement income credit to which you may be entitled in the following manner:

(1) Take the amount of your annual taxable retirement income. If you are 65 years old or over, add all income from dividends, interest, taxable annuities and gross rents. Take the figure of $1,524 regardless of the amount of your retirement income. Reduce this $1,524, dollar for dollar, by any tax-free pension or annuity or social security payments you received during the year. Further, reduce the $1,524 by any

earned income in excess of $900 if you are under age 62. If you are 62 or older but not yet 72, reduce the appropriate figure by 50% of the amount of your earned income which is in excess of $1,200, but which is not in excess of $1,700, plus the total amount over $1,700. If you are 72 years of age or over, you need make no reduction for any earned income. Any pay you received for active service in the Air Force during the year for which the tax is being computed must be considered earned income. You do not reduce the $1,524, by pensions or annuities which represent amounts received as compensation for injury or sickness, such as disability retired pay or VA compensation; amounts received under an accident or health insurance policy; amounts received under a life insurance policy by reason of the death of the insured; amounts paid by or on behalf of an employer to the estate or beneficiaries of an employee by reason of the death of the employee; amounts received by beneficiaries of an employee's trust; or amounts which represent or are considered a return of cost.

(2) You can determine the amount of your tax credit by multiplying by the lowest tax bracket, the amount of your taxable retirement income not in excess of $1,524 or the $1,524 figure, as finally reduced, whichever is the lesser.

(3) Two tax credits may be available if the wife of a retired member is receiving retirement income in her own right. If the wife is under age 65, pensions and annuities paid to her under a public retirement system also qualify as retirement income. To be eligible for the credit, the wife must have worked and earned in excess of $600 gross income per year for any 10 years before the year in which the tax credit is claimed. These years need not be consecutive.

(4) If you and your wife have both reached the age of 65 before the close of the tax year, you may elect to compute the credit under a special rule effective after 31 December 1963. A joint return must be filed if you elect to use this rule. The rule provides that if either spouse received more than $600 of earned income in each of any 10 prior calendar years, thus meeting the prior earned income test, the other spouse will also be considered to have met the prior earned income test, even though that spouse never received earned income in any

prior year. In computing the retirement income credit, the rule increases from $1,524 to $2,286, the maximum limit on the amount of the combined retirement income. The increased maximum limit must be reduced by amounts received by both spouses as earned income, pension and annuities.

c. Retired members residing in a community. property state compute their retirement income. credit based upon community property laws. In any one of the community property states, a wife may derive her right to retirement income from her community share of the retirement income received by her husband. She will be eligible for a separate tax credit based on her share of her husband's retirement income, provided she and her husband were domiciled in a community property State during any 10 years (not necessarily consecutive) of their marriage and are currently domiciled in that community property State. Under these conditions, the wife need not be receiving retirement income in her own right or have earned any money herself in previous years. In a community property State, one-half of a retired person's earned income is attributed to his wife and this may reduce the deduction for earned income in excess of that otherwise provided. On the other hand, earnings by the wife will serve to reduce the allowable credit of the husband even though he may be receiving only Air Force retirement pay in his own name.

d. An individual who is a nonresident alien at any time during the taxable year is not eligible for the retirement income credit for that taxable year. You should remember that the AFAFC will not adjust the amount of withholding tax deducted from your retired pay in consideration of any tax credit to which you may be entitled. You must compute your own tax credit on your income tax return.

68. Amended Returns and Refund Claims. If a reexamination of previous tax returns discloses a failure to take advantage of any tax saving, it would be advisable for you to file a claim for a refund of any overpayment you may have made. To do this, you may either prepare a corrected tax return (TD Form 1040) or a claim for refund (TD Form 843), for each of the years involved. The corrected return