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If you’re a veteran receiving VA benefits—or any other income tied to your military service—this article is written for you.
We’ll cut through the noise and tell you exactly what’s tax-free, what’s taxable, and how to protect every dollar you’ve earned.
Your VA disability compensation is tax-free at the federal level, and no state taxes it either.
Other income streams—like military retired pay, CRDP vs. CRSC, SBP annuities, and TSP/IRA withdrawals—can be taxable depending on the details.
This expert-level guide from Brian Reese explains everything veterans need to know right now about federal and state tax rules, the latest updates, and the smart moves to make so more money stays in your pocket.
Let’s begin!
Table of Contents
Summary of Key Points
- VA disability stays tax-free—federal and state. GI Bill/VR&E payments, VA caregiver stipends, and common VA grants (SAH/auto) are also non-taxable.
- What’s taxable: length-of-service military retired pay, CRDP (taxable) vs CRSC (tax-free), SBP annuities, most TSP/IRA/401(k) withdrawals, and possibly part of Social Security based on combined income.
- Updates to use: bigger federal standard deduction; new temporary $6,000 senior deduction (if eligible); several states expanded military-pension relief (notably CA, VA, VT, NM, MT); adjust withholding with Form W-4P/myPay.
- Action checklist: if you got a retroactive VA rating, amend with Form 1040-X for refunds; claim your state pension break; file disabled-veteran property-tax exemptions; keep DFAS 1099-R/RAS and VA letters organized so every lawful dollar stays with you and your family.
Tax Rules for Veterans: Quick Answers
Always Tax-Free
- VA disability compensation and needs-based VA pension are not taxable income per IRS Publication 525.
- Education benefits under the GI Bill and VR&E—including tuition, housing, books, tutoring, and Work-Study—are tax-free per VA.gov.
- VA Caregiver (PCAFC) stipends are non-taxable benefits per VA’s Caregiver Program.
- Common VA grants like SAH/SHA/TRA home adaptation and automobile/adaptive equipment grants are tax-free.
Taxable at the Federal Level
- Length-of-service military retirement pay is taxable and reported on Form 1099-R per DFAS.
- CRDP restores taxable retired pay and is taxable, while CRSC is a separate combat-related benefit and is tax-free per DFAS CRDP and DFAS CRSC and my explainer CRDP vs. CRSC.
- SBP survivor annuities are taxable to the recipient and reported on 1099-R per DFAS SBP and our survivor guide Best VA Survivor Benefits.
- Traditional TSP/IRA/401(k) distributions are generally taxable unless qualified Roth distributions apply.
- Social Security may be partially taxable depending on “combined income” per IRS Publication 915 and see VA Disability and Social Security.
2025 Federal Numbers You Should Know
- The 2025 standard deduction is $15,000 (Single), $30,000 (Married Filing Jointly), and $22,500 (Head of Household) per IRS and Pub 505.
- Adjust withholding on retired pay or SBP using IRS Form W-4P or in myPay so you don’t get surprised next April.
Federal Tax Rules for Veterans
What’s Always Tax-Free
- Your VA disability compensation and VA pension do not go on your tax return as income.
- GI Bill and VR&E payments for tuition, housing, books, tutoring, and Work-Study are excluded from income under VA guidance.
- The VA Caregiver stipend is a benefit, not wages, and is not taxable.
- SAH/SHA/TRA home grants and the automobile/adaptive equipment benefit are not taxable to you.
What Is Taxable
- Length-of-service military retired pay is federally taxable unless a specific state exclusion applies to you.
- CRDP is taxable because it restores retired pay, while CRSC is tax-free combat-related compensation.
- SBP annuity payments to a surviving spouse or child are taxable to the recipient.
- Taxes on TSP, IRA, or 401(k) withdrawals follow normal retirement-plan rules, and qualified Roth withdrawals are generally not taxable.
- Depending on combined income, part of your Social Security may be taxable.
Retroactive VA Ratings and Refunds
If VA grants you a retroactive disability rating, the overlapping portion of previously taxed retired pay can become excludable up to the VA amount for those months.
You can amend prior returns with Form 1040-X, and you should attach your VA decision letter showing effective dates and dollar amounts.
Keep your DFAS 1099-R and Retiree Account Statements aligned with the change, and request corrected statements if needed via DFAS.
Withholding on Retired Pay and SBP
Use Form W-4P to set or adjust federal withholding for retired pay and SBP annuities.
You can also update withholding and download tax forms in myPay and the DFAS tax center for retirees.
State Tax Rules for Veterans
The Constant
No state taxes your VA disability compensation, ever!
States do vary on how they treat military retirement pay, and a few made improvements for 2025.
States with No Broad Personal Income Tax
Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming do not levy a broad personal income tax.
New Hampshire’s Interest & Dividends tax is repealed effective January 1, 2025 per NH DRA.
2025 State Tax Updates for Veterans
- California enacted a new partial exclusion of up to $20,000 for military retirement or SBP for tax years beginning in 2025 through 2035 per FTB SB 1 analysis.
- Virginia’s Military Benefits Subtraction is $40,000 for 2025 and later, with the prior age-55 restriction removed per Virginia Tax.
- Vermont fully exempts military retirement and SBP for AGI ≤ $125,000 and offers a partial exemption up to $175,000 per MOAA update and VTDigger.
- New Mexico’s $30,000 exemption is in statute “for taxable years 2024 and thereafter,” and includes surviving spouses per HB 547 (2023).
- Montana offers a Working Military Retirement and Survivor Benefit Exemption for eligible working retirees and SBP beneficiaries per MT DOR.
If you’re choosing a state, run the all-in math—income, property, and sales tax—before you move.
For a comparison of the best veteran benefits in your state, see our guides at this link: Best Veteran Benefits by State.
Property Tax Relief for Disabled Veterans
Property-tax exemptions can be worth thousands per year and stack with income-tax savings.
Start with our national overview Disabled Veteran Property Tax Exemption by State.
Texas grants a full residence-homestead exemption for veterans rated 100% or IU and scaled exemptions for lower ratings per the Texas Comptroller.
Florida provides a $5,000 homestead reduction at 10%+ disability and a full exemption for totally and permanently disabled veterans per Florida DOR PT-109.
Common Veteran Tax Scenarios: Frequently Asked Questions (FAQs)
I just got a retroactive VA rating—what now?
Ask DFAS for any corrected Retiree Account Statement and 1099-R that reflect recharacterized pay.
Amend each affected tax year with Form 1040-X, and attach your VA decision letter with effective dates and amounts.
CRDP or CRSC—what is taxable?
CRDP is taxable because it restores retired pay, while CRSC is a separate combat-related benefit and is not taxable.
Double-check your 1099-R and DFAS statements after any program switch or rating change.
Are GI Bill or VR&E funds taxable?
No—VA’s education benefits are not taxable and are not reported as income on your return per VA.gov.
Is SBP taxable to my spouse?
Yes—SBP annuity income is taxable to the recipient and is reported on a 1099-R per DFAS.
How do I avoid a surprise bill?
Update your W-4P and myPay settings after rating changes, CRDP/CRSC changes, large distributions, employment changes, or an interstate move.
Mistakes That Cost Veterans Money
- Not amending after a retroactive rating leaves refunds on the table.
- Confusing CRDP and CRSC leads to incorrect tax treatment and withholding.
- Missing new 2025 state pension breaks like CA, VA, VT, NM, or MT costs real money.
- Forgetting to file property-tax exemptions when you’re service-connected reduces yearly savings.
- Letting withholding ride after big life changes often results in an April tax bill.
Action Checklist for Veterans
- Confirm what’s taxable vs. not using IRS Pub 525 and VA’s education tax guidance above.
- Keep your VA decision letters, DFAS Retiree Account Statements, and all 1099-Rs organized for filing and amendments.
- Amend past returns with Form 1040-X if a retro rating overlaps prior years.
- Update withholding on retired pay or SBP via W-4P or myPay when anything changes.
- Claim your 2025 state pension relief correctly if you live in CA, VA, VT, NM, or MT using the links above.
- Apply for your county or state property-tax exemptions if you’re a disabled veteran or surviving spouse.
Conclusion & Wrap-Up
Your VA disability is tax-free, and 2025 brings even more ways to protect your wallet at the federal and state levels.
Know the difference between CRDP and CRSC, watch your 1099-R, claim every state break you’ve earned, and tune your withholding so there are no surprises.
If VA just backdated your rating, amend and get your money back.
If you own a home and you’re service-connected, file those property-tax exemptions now.
You served, you deserve, and when you file smart, every lawful dollar works harder for your family!
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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.
