I am former US Military now living in Germany. What are the tax consequences to my CRSC pay?

Combat-Related-Special-Compensation (CRSC) was effectively established in 2003. It provides special compensation to members of the Uniformed Services who draw retired pay reduced because of receiving U.S. Department of Veterans Affairs (VA) disability compensation and where a portion of such VA disability compensation is the result of disabilities that are combat-related.

It is hence not military retired pay but a special benefit which is tied to preliminary and final requirements as follows:

Preliminary requirement

1. Years of Service: Depending on certain windows (2003, 2007, 2008) a certain amount of years must have been spent in the Military. While those years do not determine the amount of CRSC, they are a requirement to obtain the benefit.
2. A recipient must be in a retired status.
3. A recipient must be entitled to retired pay, notwithstanding that such retired pay may be reduced due to VA disability compensation.
4. A member must be entitled to compensation for service-connected disabilities under 38 U.S.C., as rated by the VA.

In order to be entitled to CRSC one must meet all four of those preliminary CRSC criteria and the appropriate Service must determine that the member has a combat-related disability. These are the

Final requirements

1. Purple Heart Disability attributed to injuries for which a Purple Heart was awarded.
2. Other Combat-Related disabilities based on the following criteria:
   1. The disability was incurred as a direct result of armed conflict,
   2. the disability was incurred while engaged in hazardous service,
   3. the disability was incurred in the performance of duty under conditions simulating war, or
   4. the disability was incurred through an instrumentality of war.

In the US, CRSC payments are considered tax exempt from Federal income tax under provisions of 26 U.S.C. § 104.

While the benefits are tax-free on the US side the question for a retiree in Germany is what will happen to them on the German end. For this reason it is important to understand the above concept of CRSC and to not be confused by the fact that it is paid by the Department of Defense, the recipient must have spent so many years in service or is in a retired status.

The requirements to be awarded CRSC make it abundantly clear, that they need to be treated the same way normal VA benefits need to be treated. Which means they are tax-free also in Germany and do also not have an effect on the tax rate which might be applied to any other Germany-sited income.

Also, the fact that CRSC is subject to the SBP withholding and those SBP premiums will be refunded to a surviving spouse when DIC offset is applicable, does not change anything about the tax treatment of the CRSC benefit in Germany.

Please let the taxperts know once you are drawing CRSC benefits and feel like your tax office might not know how to treat them or is treating them erroneously. We are happy to lock horns with the tax office to set them straight – you have sacrificed enough to just cut the Germans in on your hard-earned benefit.