In December 2016, lawmakers advised that a potential 13,800 veterans had had taxes mistakenly withheld from lump-sum disability separation pay and were due refunds. The term “disability severance pay” (DSP) refers to one-time lump sum payments made to service members separated due to medical disability. DSP is paid to service members who are separated specifically because they are not fit for duty due to their disability. To be eligible, service members must be found unfit for duty; have less than 20 years of service; and have a disability rating of less than 30 percent. (“Disability rating” refers to the percentage assigned to a veteran’s medical condition to determine the amount of military benefits he or she should receive.) By law, DSP is not taxable if it is paid for combat-related injuries determined by the military service at the time of separation, or the veteran is eligible for disability compensation from the Department of Veterans Affairs (VA).
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