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After leaving the military, many veterans rely on various federal and state benefits to support their transition to civilian life.
But when the tax season rolls around, two critical questions arise:
- Are your veteran benefits taxable?
- If yes, which ones?
The answers depend on the specific veteran benefits you receive and your individual circumstances.
While it’s always smart to consult a tax professional, here’s a comprehensive breakdown to help you understand what is taxable and what isn’t.
Table of Contents
Summary of Key Points
- Tax-Free VA Benefits: Most VA disability benefits, including compensation, pensions, and education assistance, are tax-exempt and do not need to be reported as income.
- Taxable Military Retirement Pay: Military retirement pay is taxable, but some disability retirement pay may be tax-exempt, especially if related to combat injuries or pre-1975 service.
- Veterans Education and Healthcare Benefits: GI Bill® education benefits and VA healthcare services are tax-free, covering tuition, housing, and medical care for veterans and dependents.
- State-Specific Tax Exemptions for Veterans: Many states provide tax-free benefits like property tax exemptions, free licenses, and tuition waivers for veterans, with 20 states offering full property tax exemptions for 100% disabled veterans.
#1. VA Disability Benefits (Tax-Free)
VA disability benefits are tax-free and do not need to be reported as income.
Tax-Exempt VA Disability Benefits Include:
- VA Disability Compensation: Payments for service-connected disabilities that affect earning capacity or quality of life.
- Special Monthly Compensation (SMC): Additional payments for veterans with severe disabilities, such as loss of limbs, blindness, or the need for aid and attendance.
- Dependency and Indemnity Compensation (DIC): Payments to surviving spouses, children, or parents of veterans who died in the line of duty or from service-connected conditions.
- VA Pension Payments: Needs-based financial assistance for low-income wartime veterans who are permanently disabled and their surviving spouses.
- VA Aid and Attendance Benefits: Additional payments for veterans and surviving spouses who require help with daily living activities, such as bathing, dressing, or eating.
- VA Vocational Rehabilitation and Employment (VR&E): Job training, education, and employment assistance for veterans with service-connected disabilities.
- VA Housing Grants: Financial support to help veterans build or modify wheelchair-accessible homes through programs like the Specially Adapted Housing (SAH) and Special Housing Adaptation (SHA) grants.
- VA Vehicle Grants: Financial assistance for purchasing or modifying vehicles for veterans with mobility impairments due to loss of limbs, eyesight, or severe burns.
- VA Dependent-Care Assistance Programs: Financial aid for veterans needing assistance with childcare or caregiving responsibilities.
- VA Life Insurance Programs: Low-cost life insurance policies and tax-free payouts to beneficiaries under programs such as Veterans Affairs Life Insurance (VALife).
- VA Burial and Memorial Benefits: Assistance with funeral costs, burial plots, headstones, and grief counseling for surviving family members.
Pro Tips:
- Retroactive Refund Opportunity: If the VA increases your disability rating, you may qualify for a tax refund for prior years. File an amended return (Form 1040X) to claim the refund.
- Retroactive Adjustments: Back pay for disability benefits may also qualify for a tax refund. Consult a tax professional to maximize your refund potential.
#2. GI Bill® Education Benefits (Tax-Free)
Education benefits provided under the GI Bill® (e.g., Post-9/11 GI Bill, Montgomery GI Bill) are tax-free.
Covered Benefits Include:
- Tuition and Fees: Payments made directly to schools or institutions.
- Housing Allowances: Monthly stipends for living expenses while attending school.
- Books and Supplies: Annual payments to help cover the cost of educational materials.
Pro Tips:
- You can claim education tax credits, like the Lifetime Learning Credit or the American Opportunity Tax Credit, to cover any out-of-pocket expenses not paid by the GI Bill®. Credits are reduced by the amount covered by your GI Bill®.
#3. Military Retirement Pay (Taxable)
Military retirement pay based on age or length of service is considered taxable income and must be reported on your federal tax return.
Key Details:
- Survivor Benefit Plan (SBP): Payments made to provide annuities for a spouse or dependent are not taxable.
- Social Security Taxes: Military retirement pay is not subject to Social Security taxes, meaning it doesn’t count as earned income for Social Security purposes.
#4. Military Disability Retirement Pay (Partially Taxable)
Military disability retirement pay is tax-exempt if:
- You were entitled to receive disability pay before September 25, 1975.
- You were a service member (active or reserve) on or before September 24, 1975.
- Your disability is combat-related or caused by hazardous service, training exercises, or war instruments.
Pro Tip:
- Veterans receiving Concurrent Retirement and Disability Pay (CRDP) or Combat-Related Special Compensation (CRSC) may qualify for tax refunds if their pay was improperly taxed in the past.
#5. Lump-Sum Disability Severance Pay (Tax-Free in Most Cases)
Lump-sum disability severance pay is tax-free if you later qualify for VA disability compensation.
Exceptions:
- Non-disability severance payments (e.g., separation pay) are taxable, even if you later receive a disability rating.
- Veterans affected by the Combat-Injured Veterans Tax Fairness Act of 2016 may be entitled to tax refunds due to improperly taxed severance pay.
#6. VA Healthcare Benefits (Tax-Free)
Veterans enrolled in VA healthcare receive tax-free medical care for service-connected conditions.
Coverage Includes:
- Hospital care, mental health services, preventive care, and prescriptions.
- Free or low-cost dental care, vision care, and hearing aids (depending on your VA disability rating).
#7. State Specific Veteran Benefits (Varies by State)
Many states offer tax-free benefits for veterans, including:
- Property tax exemptions (depending on your VA disability rating).
- Free license plates, hunting, and fishing licenses.
- Tuition waivers for veterans and dependents.
Pro Tip:
Veterans should check their official state veteran benefits website for specific eligibility and benefits.
About the Author
Brian Reese
Brian Reese is a world-renowned VA disability benefits expert and the #1 bestselling author of VA Claim Secrets and You Deserve It. Motivated by his own frustration with the VA claim process, Brian founded VA Claims Insider to help disabled veterans secure their VA disability compensation faster, regardless of their past struggles with the VA. Since 2013, he has positively impacted the lives of over 10 million military, veterans, and their families.
A former active-duty Air Force officer, Brian has extensive experience leading diverse teams in challenging international environments, including a combat tour in Afghanistan in 2011 supporting Operation ENDURING FREEDOM.
Brian is a Distinguished Graduate of Management from the United States Air Force Academy and earned his MBA from Oklahoma State University’s Spears School of Business, where he was a National Honor Scholar, ranking in the top 1% of his class.
