Separation pay: know the consequences

SHEPPARD AIR FORCE BASE -- Many military members are facing a tough choice at this time - do they stay on active duty or apply for voluntary separation? 

The temptation to request separation, with its resulting windfall of separation pay, is very tempting to many people. Anyone facing this choice should keep several things in mind concerning the consequences of receiving separation pay. 

First, separation pay is taxable. Finance will deduct an amount for federal and state income taxes prior to your final pay. In other words, your final pay amount will be significantly less than the amount of separation pay you were told you were entitled to receive. 

When you file your income tax return for the year in which you receive separation pay, the separation pay you receive will count as income earned for that year. This can affect your taxes in several ways, including potentially making you ineligible for certain tax credits or deductions you have been entitled to in the past.
In short, your tax return for that year may be significantly different than your tax returns for previous years. 

Second, many individuals who choose to separate from active duty retain a military connection by becoming a reservist or National Guard member. If you receive separation pay upon your separation from active duty but enlist in the reserves or guard, you may be required to repay the amount of separation pay you received if you later become entitled to retirement pay through the reserve or guard systems. 

Next, some individuals will be entitled to Veteran's Administration disability compensation payments upon their separation from active duty status. If you are entitled to VA disability compensation, you will be required to forfeit these VA disability payments until the amount of VA benefits you forfeit equal the amount of after-tax separation pay you received. 

This article is not designed to sway any individual's opinion concerning making a decision to apply for separation or not. It is designed to bring certain information to your attention so that you make a fully-informed decision concerning the best course of action for you and your family.