This IRS FAQ discusses the Protecting Americans from Tax Hikes Act of 2015 (PATH Act):

Congress added a new exclusion from income under section 139F of the Internal Revenue Code. Under this new exclusion, a wrongfully incarcerated individual does not include in income any civil damages, restitution, or other monetary award received that relates to his or her incarceration for the covered offense for which he or she was convicted (Wrongful Incarceration Exclusion).

A reversed court-martial conviction, resulting in back pay, likely qualifies for this exclusion. There is, however, a deadline. The above-linked FAQ explains:

Q6: What is the deadline for a wrongfully incarcerated individual to claim a refund of an overpayment of tax for an award included in income in a prior tax year that qualifies for the Wrongful Incarceration Exclusion?

A6: The wrongfully incarcerated individual must file the claim for refund within three years from the date the individual filed the income tax return that previously reported the award or two years from the date the individual paid the tax on the award, whichever is later.  However, Congress provided a special provision permitting wrongfully incarcerated individuals to file a refund claim even if the claim does not meet either the three-year or two-year deadline.  A wrongfully incarcerated individual who cannot meet the three-year or two-year deadline and who is relying on this special provision must file his or her claim for refund by Dec. 17, 2018

Jon Eldan from the non-profit organization After Innocence (www.after-innocence.org) recently contacted me and offered to provide free accounting and legal assistance services to veterans to determine eligibility and claim a refund. A Huffington Post article about his work is available here. Jon’s email address is jon@after-innocence.org

This is not an endorsement of Mr. Eldan or the After Innocence project.

5 Responses to “Back pay as a result of a reversed court-martial conviction may be tax-free”

  1. Eric Brendan Smith says:

    Thank you, Mr. Spilman, for posting this.  Getting back on my feet financially has been rough for the common reasons (multiple transitions and still fighting for full exoneration). 
    This information may have a notably positive financial impact and bring some needed relief to my household.  I will spread the word to other exonerees through the Save Our Heroes Project.

  2. k fischer says:

    Speaking of tax consequences for the wrongfully convicted……
     
    Did you know that attorney’s fees for a Court-martial are tax deductible?  See Howard v. C.I.R., 16 T.C. 157, 157 (Tax 1951), aff’d, 202 F.2d 28 (9th Cir. 1953)(“Expenses for legal fees and costs incurred in a Court Martial proceeding against petitioner were deductible from income of petitioner.”)
     
    This would be a Schedule A itemized deduction for which the accused would be permitted to deduct fees exceeding 2% of AGI because you incurred legal fees as a business expense to keep your current job.  I would imagine that this applies to attorney’s fees spent on separation boards and security clearance actions, as well, both of which would have to exceed 2% of AGI, respectively.

  3. stewie says:

    Great, now I have a reason to raise my rates when I retire and become a CDC ;)

  4. kf says:

    Good luck with that my friend.  Good thing is that you will have a retirement to fall back on during that month when when those five lower enlisted inquirers with great cases, respectively ask you if you “take payments.”  

  5. Charlie Gittins says:

    After court-martial acquittals and ad boar/BOI no misconduct/no discharge cases, I had a form letter that I sent to clients that provided them with the relevant Tax Court and Revenue Ruling citations and told them to have their taxes prepared by an accountant to claim the deductions.  Same with BCMR cases where I won. 

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