Disabled veterans’ CWT payments now tax-free; some may be due refunds 

Payments under the Department of Veterans Affairs (VA) Compensated Work Therapy (CWT) program are no longer taxable for state or federal purposes. Disabled veterans who paid tax on these benefits for the 2003 through 2006 tax years (2004 through 2006 for federal purposes) may now file claims for refund using Form 540X (Form 1040X for federal purposes). (Rev. Rul. 2007-69; E-mail to Spidell Publishing from the FTB dated Dec. 28, 2007)

The IRS agreed with a 2007 U.S. Tax Court decision, which held that CWT payments are tax-free veterans’ benefits. (Wallace v. Commr. (2007) 128 T.C. 132 , acq., 2007-44-I.R.B. _____) In so doing, the IRS has reversed a 1965 ruling that held that these payments were taxable and required the VA to issue 1099s to payment recipients. Recipients of CWT payments will no longer receive 1099s from the VA.