Severance Pay Subject to Medical Disability
Armed Forces members who have been separated from active duty for years of service or medical reasons are given severance payments, which are taxable as wages.
If the member receives disability severance pay and is later awarded Veterans Affairs (VA) disability benefits, 100% of the disability severance benefit may be excluded from income.
This process takes several months and sometimes years. Until the VA makes the determination and sends the discharged Armed Forces member a letter of determination, the Armed Forces member will receive the total "pension," which is taxable.