Combat-Related Special Compensation is not taxable. CRSC payments are fully excluded from federal gross income under 26 U.S.C. § 104(a)(4), which shields compensation received by reason of a combat-related injury incurred in armed conflict, extrahazardous service, conditions simulating war, or through an instrumentality of war.1Office of the Law Revision Counsel. 26 USC 104 – Compensation for Injuries or Sickness The Armed Forces Tax Council has confirmed that every CRSC payment falls within that exclusion.2Department of Defense. Combat-Related Special Compensation Program Guidance You owe no federal income tax on it, and you do not report it as income on your return.
Where CRSC Shows Up on Your Tax Forms
Because CRSC is tax-exempt, it is not included in Box 1 (Gross Distribution) of the Form 1099-R that DFAS issues each year. 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 appears on your Retiree Account Statement in myPay, which breaks down each component of your pay separately. If the 1099-R number looks lower than you expected, the gap is almost always the CRSC and VA compensation amounts that were correctly left off. In practice you receive three monthly streams: 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
Why Tax-Free Status Is Worth More Than It Looks
CRSC does not just skip the income tax line. Because it never enters gross income, it stays out of your adjusted gross income entirely. A lower AGI can preserve eligibility for income-based tax credits, reduce the portion of Social Security benefits subject to tax, and keep Medicare Part B and Part D premiums below the surcharge thresholds for retirees whose income sits close to those lines.
Put a number on it. A $1,500 monthly CRSC payment is $18,000 a year that never touches your AGI. The direct tax savings on that amount are only part of the picture; the AGI-driven effects on credits, Social Security taxation, and Medicare premiums can add meaningful dollars on top.
CRSC or CRDP: The Tax Status Drives the Choice
If your disability qualifies you for both CRSC and Concurrent Retirement and Disability Pay, you cannot collect both. You have to pick one.5Defense Finance and Accounting Service. CRDP and CRSC Frequently Asked Questions The tax treatment is the whole reason the choice is not obvious on gross dollars alone.
CRDP restores waived retired pay for retirees rated at 50% or higher by the VA, but CRDP is taxable. It flows through your 1099-R as regular retired pay and raises your AGI. CRSC restores only the combat-related portion of the waiver, but it is entirely tax-free. A smaller CRSC payment can net more after tax than a larger CRDP payment, particularly for retirees in higher brackets or near Medicare or Social Security thresholds.
DFAS runs an annual open season from January 1 through January 31. During that window DFAS sends eligible retirees a letter showing both entitlement amounts so you can compare. To switch, return the election form with the “change my entitlement” box checked, postmarked by January 31. If you want to keep your current election, do nothing — it carries forward.6Defense Finance and Accounting Service. December 2025 Retiree Newsletter CRDP CRSC Open Season FAQs
One trap: you cannot switch outside the open season, even if your entitlement amounts change mid-year. If a VA rating increase in March suddenly makes CRSC the better deal on paper, you are locked in until the following January.6Defense Finance and Accounting Service. December 2025 Retiree Newsletter CRDP CRSC Open Season FAQs
Retroactive CRSC Awards and Amended Returns
When CRSC is approved retroactively, you have usually paid federal income tax on retired pay that should have been offset by tax-free CRSC in those earlier years. You recover the overpayment by filing Form 1040-X (Amended U.S. Individual Income Tax Return) for each affected tax year.7Internal Revenue Service. Tax Considerations for Veterans
This is where the clock matters. Under 26 U.S.C. § 6511, a refund claim 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 your retroactive award covers five years but you take your time filing, the oldest years can fall outside the refund window. The CRSC back payment itself is not time-barred the same way, but the tax refund attached to those years is.
When a retroactive award comes through, work the amended returns oldest year first. Those are the ones closest to the deadline.
What Tax-Free Does Not Mean
Exempt from income tax is not the same as untouchable. CRSC can be garnished to satisfy court-ordered child support or alimony. It is not, however, military retired pay, so it cannot be divided as marital property under the Uniformed Services Former Spouses’ Protection Act (10 U.S.C. § 1408); regular retired pay is divisible under that statute, and CRSC sits outside it. That distinction can shape divorce negotiations, because electing CRSC over CRDP can shrink the pool of divisible retired pay available to a former spouse.
Since 2018, DFAS has also deducted Survivor Benefit Plan premiums from CRSC when remaining retired pay is not enough to cover the full premium, which prevents an unpaid-premium debt from being charged against the survivor’s annuity later.9Defense Finance and Accounting Service. Paying for SBP CRSC itself does not continue to a surviving spouse; only the SBP annuity does.
State Taxes
Federal tax treatment is settled: CRSC is excluded from federal gross income under § 104. State income tax treatment is not addressed in the federal statutes or the DFAS and DoD guidance governing the program, so check your state’s rules on military retirement and disability pay before assuming your state follows the federal exclusion.