Combat-Related Special Compensation is not taxable. Under 26 U.S.C. § 104(a)(4), CRSC is excluded from gross income as compensation for a combat-related injury, and the Armed Forces Tax Council has confirmed that every CRSC payment falls within that exclusion.1Office of the Law Revision Counsel. 26 USC 104 – Compensation for Injuries or Sickness2Department of Defense. Combat-Related Special Compensation Program Guidance You owe no federal income tax on it, it doesn’t appear on your Form 1099-R, and it doesn’t count toward your adjusted gross income.
The Statutory Basis for the Exemption
Section 104(a)(4) of the Internal Revenue Code excludes from gross income amounts received “as a pension, annuity, or similar allowance for personal injuries or sickness resulting from active service in the armed forces.” The statute preserves that exclusion for anyone receiving compensation “by reason of a combat-related injury,” which it defines as an injury incurred as a direct result of armed conflict, while engaged in extrahazardous service, under conditions simulating war, or caused by an instrumentality of war.1Office of the Law Revision Counsel. 26 USC 104 – Compensation for Injuries or Sickness Because CRSC exists specifically to compensate for those categories of injury, the entire payment is exempt. No portion is taxable, and the exemption applies at the federal level automatically. There is no election to make and no form to file to claim it.
How CRSC Appears on Your Tax Forms
DFAS issues Form 1099-R each year to report your taxable retirement income. Because CRSC is tax-exempt, the CRSC amount is not included in Box 1 (Gross Distribution). The 1099-R reflects only the taxable portion of your retired pay.3Defense Finance and Accounting Service. Getting Your 1099-R
Your total CRSC for the year is documented on the Retiree Account Statement (RAS) available through myPay. The RAS breaks down each component of your pay separately. If your 1099-R looks lower than you expected, that’s usually why: your monthly income stream has three parts, and only one of them is taxable. You receive reduced taxable retired pay from the Department of Defense, tax-free VA disability compensation from the VA, and tax-free CRSC from DFAS. Only the first appears on the 1099-R.4Defense Finance and Accounting Service. VA Waiver and Retired Pay, CRDP, and CRSC
Keep your monthly RAS statements. If a question ever arises about what portion of your pay was taxable in a given year, the RAS is where the breakdown lives.
Why the Tax-Free Status Is Worth More Than It Looks
CRSC’s exclusion from gross income does more than save you the tax on the payment itself. Because it never enters your AGI, it doesn’t push you toward income-based thresholds elsewhere in the tax system. A lower AGI can preserve eligibility for income-tested credits, reduce the share of Social Security benefits that becomes taxable, and keep you below the income surcharges that raise Medicare Part B and Part D premiums.
A $1,500 monthly CRSC payment is $18,000 a year that never touches your AGI. For a retiree sitting near a Medicare surcharge bracket or the Social Security taxability thresholds, the downstream savings can rival the direct tax savings on the payment.
CRSC or CRDP: The Tax Difference Drives the Choice
If your disability qualifies you for both Concurrent Retirement and Disability Pay (CRDP) and CRSC, you cannot collect both. You pick one.5Defense Finance and Accounting Service. CRDP and CRSC Frequently Asked Questions The tax treatment is the reason the smaller number sometimes wins.
CRDP restores waived retired pay for retirees with a VA disability rating of 50% or higher, but CRDP is taxable. It flows through as regular retired pay on your 1099-R and increases your AGI. CRSC restores only the combat-related portion, but it’s entirely tax-free. A smaller CRSC payment often nets more after-tax income than a larger CRDP payment, especially in higher brackets or where a lower AGI protects other benefits.
DFAS mails an annual comparison letter during the open season, January 1 through January 31. The letter shows both entitlement amounts side by side. To switch, you return the election form with the change box checked, postmarked by January 31. If you’re satisfied with your current election, do nothing and it carries forward.6Defense Finance and Accounting Service. December 2025 Retiree Newsletter CRDP CRSC Open Season FAQs
One trap catches people every year: you cannot switch outside the January window, even if a VA rating change mid-year would flip the math. If your rating goes up in March and CRSC becomes the better deal, you’re locked into your current election until the following January.6Defense Finance and Accounting Service. December 2025 Retiree Newsletter CRDP CRSC Open Season FAQs
Retroactive CRSC Awards and Amended Returns
CRSC awards are often retroactive. That creates a specific tax problem: in the years now covered by the award, you paid federal income tax on retired pay that should have been offset by tax-free CRSC. You can recover that overpayment, but only within the IRS’s refund window.
You file Form 1040-X (Amended U.S. Individual Income Tax Return) for each affected tax year.7Internal Revenue Service. Tax Considerations for Veterans Under 26 U.S.C. § 6511, the amended return must be filed within three years from when the original return was filed, or two years from when the tax was paid, whichever is later.8Office of the Law Revision Counsel. 26 USC 6511 – Limitations on Credit or Refund
If a retroactive award covers five or six years, the oldest ones may already be outside the refund window or close to it. Miss the deadline and the refund for that year is permanently gone, even though the CRSC back payment itself is not time-barred the same way. When your approval letter arrives, work from the oldest tax year forward. Those are the returns closest to the wall.
Tax-Free Doesn’t Mean Untouchable
The § 104 exclusion is a federal income tax rule. It doesn’t shield CRSC from every claim on the money. CRSC can be garnished to satisfy court-ordered child support or alimony. It is not military retired pay under the Uniformed Services Former Spouses’ Protection Act (10 U.S.C. § 1408) and cannot be divided as marital property in a divorce, but that same feature can shrink the divisible retired pay available to a former spouse and become a point of contention in negotiations.
DFAS also deducts Survivor Benefit Plan premiums from CRSC when the retiree’s remaining retired pay isn’t enough to cover the full premium, a practice in place since 2018.9Defense Finance and Accounting Service. Paying for SBP And CRSC itself does not continue to a surviving spouse. Only the SBP annuity does. None of this changes the federal tax answer: while you receive CRSC, it is not taxed.