Concurrent Retirement and Disability Pay is taxable at the federal level. The IRS treats CRDP as military retired pay, not as VA disability compensation, so the full amount flows onto your 1099-R and is reported as ordinary pension income on your return. Your separate VA disability check remains tax-free; CRDP does not.
Why the IRS Treats CRDP as Retired Pay
Before 10 U.S.C. § 1414 was enacted, retirees had to waive a dollar of military retired pay for every dollar of VA disability compensation. CRDP reversed that trade for retirees with 20 years of service and a combined VA rating of 50% or higher, letting them collect both.1Office of the Law Revision Counsel. 10 USC 1414 – Members Eligible for Retired Pay Who Are Also Eligible for Veterans Disability Compensation for Disabilities Rated 50 Percent or Higher: Concurrent Payment of Retired Pay and Veterans Disability Compensation
The mechanism matters for taxes. CRDP restores the retired pay you previously had to give up. It does not create a new disability benefit. Because the payment is retired pay, it keeps the tax character of retired pay, which is taxable as ordinary income under IRS rules for pensions.2Internal Revenue Service. Publication 525, Taxable and Nontaxable Income
VA disability compensation is excluded from gross income under 26 U.S.C. § 104.3Office of the Law Revision Counsel. 26 USC 104 – Compensation for Injuries or Sickness That exclusion covers what the VA pays you directly. It does not reach CRDP, because CRDP is paid by DFAS out of your military retirement, not by the VA. The VA disability check itself stays tax-free and arrives separately. CRDP just removes the offset that used to reduce your retired pay.
DFAS handles CRDP accordingly. It withholds federal income tax from the restored amount, folds it into your gross retired pay, and reports the total on the 1099-R it sends you each January.4Defense Finance and Accounting Service. Combat-Related Special Compensation (CRSC) and Concurrent Retirement Disability Pay (CRDP)
How CRDP Appears on Your 1099-R
DFAS releases 1099-R forms through myPay in mid-December, with paper copies mailed by January 31.5Defense Finance and Accounting Service. DFAS Announces 2025 Tax Statement Release Schedule There is no separate CRDP line. DFAS considers CRDP part of your gross retired pay, so the restoration is already inside the totals on the form.6Defense Finance and Accounting Service. Getting Your 1099-R
Box 1 shows your gross distribution, which includes CRDP. Box 2a shows the taxable amount.7Internal Revenue Service. Instructions for Forms 1099-R and 5498 (2025) For most CRDP recipients those two boxes match, and the entire distribution is taxable. They can diverge if you have a cost basis in your retirement, such as after-tax contributions for the Survivor Benefit Plan.
On Form 1040, the Box 1 amount goes on Line 5a and the Box 2a taxable amount on Line 5b. If your pension is fully taxable, the 1040 instructions have you enter the total on Line 5b and leave 5a blank.8Internal Revenue Service. 2025 Instructions for Form 1040
State Income Tax on CRDP
Because CRDP is classified as military retired pay, any state exemption for military pensions applies to it. Most states either have no income tax or fully exempt military retirement pay. Some offer partial exemptions tied to age or income. A smaller group taxes military pensions like any other income, with California applying its regular rates and no military pension exemption.
If you live in a state that fully exempts military retired pay, CRDP is effectively state tax-free even though it remains federally taxable. Confirm your state’s rule with its department of revenue before assuming either way, because the treatment shifts the real cost of receiving CRDP.
The Tax-Free Alternative: CRSC
Combat-Related Special Compensation is the tax-free counterpart to CRDP. CRSC is special compensation for combat-related disabilities and is excluded from income entirely. IRS Publication 525 confirms the exclusion for payments under 10 U.S.C. § 1413a.2Internal Revenue Service. Publication 525, Taxable and Nontaxable Income
You cannot draw both at the same time.9Defense Finance and Accounting Service. CRDP CRSC FAQs If you qualify for both, DFAS sends an annual Open Season letter showing each entitlement in dollars so you can choose the one that leaves you with more after tax. The 2026 Open Season runs January 1 through January 31, 2026, and any election change must be postmarked by that deadline.10Defense Finance and Accounting Service. CRDP CRSC Open Season FAQs
Running the comparison is straightforward once you have the letter. Take the CRDP gross figure, subtract your marginal federal rate (and state rate, if your state taxes military pensions), and set that net against the full CRSC amount. CRDP often wins on gross dollars because it covers your entire VA waiver, while CRSC is limited to the compensation rate for combat-related disabilities only. Taxes can close or reverse that gap, especially for retirees in higher brackets and in states without a military pension exemption.
The payment mechanics also change with the election. Switching from CRDP to CRSC splits your monthly deposit into two: taxable retired pay and tax-free CRSC. Switching from CRSC to CRDP consolidates everything back into a single taxable deposit.9Defense Finance and Accounting Service. CRDP CRSC FAQs
Retroactive VA Ratings and Amended Returns
A VA rating decision that reaches back several years can mean you overpaid federal tax during that period. Retired pay you received should have been partially offset by the VA waiver during those months, and since it wasn’t, ordinary income tax was withheld on money that should have been excluded as VA disability compensation.
The fix is Form 1040-X for each affected year, reducing the retirement income reported to reflect the waiver that would have applied. A wrinkle applies to CRDP-eligible retirees: you cannot claim a refund on the full VA compensation figure, because CRDP would have restored part of that waiver as taxable retired pay. You need the net waiver after CRDP for each year in question.
The usual refund window is three years from when you filed the original return. Federal law extends that for retroactive VA disability determinations, giving you an additional year from the date of the VA’s determination to file. The extension only reaches tax years that began within five years before the determination date.11Office of the Law Revision Counsel. 26 US Code 6511 – Limitations on Credit or Refund
If the VA raises your rating going forward rather than retroactively, DFAS adjusts your CRDP to match the new waiver amount. There is usually a lag between the VA decision and the DFAS payment change, which creates retroactive debits or credits on your retirement account.12Defense Finance and Accounting Service. VA Waiver and Retired Pay – CRDP – CRSC Your 1099-R for that year reflects the net amount actually paid, so the tax reporting follows the cash rather than the entitlement.