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 firstname.lastname@example.org
This is not an endorsement of Mr. Eldan or the After Innocence project.