A veteran posting as "Dorothy" wrote on the "Non-governmental U.S. Veteran Information" website:
"Many medically discharged vets, including some good friends of mine, don't know they are entitled to get the taxes back if they get a VA rating. The ones who do know they are entitled (like I did) don't know how to go about doing it. If I can spare anyone what I went through trying to figure it out, its worth it."
See for yourself at: IRS publications 17 (Your Federal Income Tax) at page 52, and & IRS publications 525 (Taxable & Non-taxable Income) at page 17 both say that those who receive a lump-sum disability severance payment and are later awarded VA disability benefits can exclude 100% of the severance benefit from income. Unfortunately, neither publication says how and, as an added complication, it can happen that VA disability ratings are awarded after taxes on the lump-sum are already paid.
"Dorothy" worked through the process and posted a step-by-step procedure here: http://www.usvetinfo.com/meddischarge.htm
I, personally, have not worked through the process but it looks worth taking advantage of the prior experience of those who have. Read more on USVI: http://www.usvetinfo.com/meddischarge.htm
And thanks for the head's up from the blog Military & Veterans: Politics for the deserving