OHIO LEGISLATIVE SERVICE COMMISSION
Office of Research Legislative Budget
www.lsc.ohio.gov and Drafting Office
H.B. 18 Final Analysis
133rd General Assembly
Click here for H.B. 18’s Fiscal Note
Version: As Passed by the General Assembly
Primary Sponsors: Reps. Vitale and Crawley
Effective date: May 26, 2020
Effective Date:
Mackenzie Damon, Attorney UPDATED VERSION
SUMMARY
Authorizes an income tax deduction for all disability severance pay received by an
honorably discharged veteran.
Allows a taxpayer who is eligible for an Ohio income tax refund based on disability
severance pay that was erroneously taxed at the federal level to apply for the refund
even if the statutory deadline has passed, so long as the taxpayer requests the refund by
December 31, 2020.
DETAILED ANALYSIS
Disability severance pay
The act exempts all disability severance pay received by an honorably discharged
veteran from Ohio’s personal income tax. Under prior law, certain disability severance
payments were exempt from taxation while others were not, depending on the circumstances
under which the payments were made.
Disability severance pay is a one-time lump sum benefit received by a former member
of the armed forces with a service-connected disability that is significant enough to prevent
them from performing required duties but is not of a sufficient rating to activate eligibility for
disability retirement (i.e., 30% or greater). Disability severance pay is computed by multiplying
the veteran’s years of service by two months of base pay.1 It is taxable for federal income tax
purposes unless one or more of the following apply:
This version updates the effective date.
1 10 United States Code (U.S.C.) § 1212.
April 17, 2020
Office of Research and Drafting LSC Legislative Budget Office
1. The veteran was enlisted before September 24, 1975;
2. The veteran’s injury occurred in a terrorist attack or is combat-related – meaning it
resulted directly from an armed conflict, took place while engaged in extra-hazardous
service, took place under conditions simulating war (e.g., training exercises), or was
caused by an instrumentality of war;
3. The veteran is entitled to receive disability compensation from the United States
Department of Veterans Affairs (VA).2
Under the circumstance described in (3), above, the federal exemption is limited to the
amount of disability compensation the veteran would have received from the VA. Disability
compensation awarded by the VA is computed based on the veteran’s disability rating and
number of dependents. It is then offset by any amount the veteran received as disability
severance pay. If the disability severance pay exceeds the amount of VA disability
compensation to which the veteran would have been entitled, the remainder of the disability
severance pay is taxable income.3
Ohio income tax
Ohio uses federal adjusted gross income (FAGI) as a starting point in computing Ohio
taxable income for state income tax purposes. Therefore, if disability severance pay is exempt
from the federal income tax, that exemption carries through to Ohio’s income tax.
Correspondingly, any such pay that is taxable at the federal level would also be taxable in Ohio,
unless otherwise exempted by Ohio law.4
The act exempts all disability severance pay from Ohio income tax to the extent it would
otherwise be taxable if the recipient is discharged or released from the armed forces under
honorable conditions. Amounts received by such an individual in 2019 or thereafter may be
deducted when computing the individual’s taxable income.5
Combat-Injured Veterans Tax Fairness Act of 2016
In 2016, Congress passed the Combat-Injured Veterans Tax Fairness Act. This Act
addressed erroneous taxation by the federal government of certain disability severance pay
2 26 U.S.C. § 104(a)(4), (a)(5), and (b)(2).
3See Internal Revenue Service Publication No. 525 (2018), pg. 18, available at:
https://www.irs.gov/pub/irs-pdf/p525.pdf.
4 Under continuing law, Ohio allows veterans to deduct amounts received as “retired personnel pay” for
service in the uniformed services, reserves, or National Guard. It is not clear whether certain federally
taxable disability severance pay qualifies as retired personnel pay for this deduction – a case for
qualification would have to overcome the legal principle that tax exemption statutes are strictly
construed against the claimant. See, e.g., Anderson/Maltbie Partnership v. Levin, 127 Ohio St.3d 178, ¶
16 (2010).
5 R.C. 5747.01(A)(34) and Section 3 of the act.
P a g e |2 H.B. 18
As Passed by the General Assembly
Office of Research and Drafting LSC Legislative Budget Office
that should have been tax-exempt. It required the Secretary of Defense to notify veterans that
received such a payment after January 17, 1991, that they may be eligible for a refund. The
statute of limitations for claiming a federal tax refund with respect to those veterans also was
extended.6
A veteran who receives a federal tax refund under the Combat-Injured Veterans Tax
Fairness Act might also be eligible for an Ohio income tax refund. Generally, applications for
refunds must be submitted within four years after the excessive tax payment or, if the refund
arises from a change to the taxpayer's federal income tax liability, 90 days after the taxpayer's
FAGI is finally determined. The act extends this latter deadline, for taxpayers whose change in
federal tax liability relates to disability severance pay, to 180 days after the taxpayer's FAGI is
finally determined.7
The act also explicitly allows a taxpayer who is eligible for an Ohio income tax refund
based on the Combat-Injured Veterans Tax Fairness Act to claim that refund for any taxable
year before 2019, even if the statutory deadline to file a refund application for that taxable year
has passed, so long as the taxpayer requests the refund before December 31, 2020.8
HISTORY
Action Date
Introduced 02-12-19
Reported, H. Ways & Means 03-20-19
Passed House (98-0) 03-27-19
Reported S. Ways & Means 12-17-19
Passed Senate (33-0) 12-17-19
House concurred in Senate amendments (94-0) 01-28-20
20-HB18-UPDATED-133/ts
6 H.R. 5015, 114th Congress (2016). In 1991, a federal district court found that a veteran’s disability
severance payment constituted an allowance for active service injury and therefore excluded from
taxable income under 26 U.S.C. 104(a)(4). St. Clair v. United States, 778 F.Supp. 894.
7 R.C. 5747.10(B) and 5747.11(B), the latter section is not in the act.
8 Section 3 of the act.
P a g e |3 H.B. 18
As Passed by the General Assembly
Statutes affected: As Introduced: 5747.01
As Reported By House Committee: 5747.01
As Passed By House: 5747.01
As Reported By Senate Committee: 5747.01, 5747.10, 5733.40
As Passed By Senate: 5747.01, 5747.10, 5733.40
As Enrolled: 5747.01, 5747.10