Are VA Benefits Taxable?

Navigating tax requirements and language may be challenging for anybody, but it’s more so for Veterans. Veterans get a wide range of benefits and pensions, many of which are taxed differently. To add to the confusion, each state has its own Veterans’ Affairs agency, which means that although there are federal tax advantages for Veterans, there are also several state-specific tax benefits. Veterans Affairs (VA) benefits and taxes are explained here.

Types of Benefits Available to Veterans

Cash and discount benefits are the two most common forms of VA benefits.

When you retire or are disabled as a result of your military service, you are entitled to receive monthly compensation from the government. You may potentially be eligible for Social Security disability payments if you have been rendered fully and permanently disabled.

Veterans can also take advantage of special savings on mortgages, tax preparation, counseling, and the Post-9/11 GI Bill.

Regulated under the umbrella body of Veteran’s Affairs Health Care Services, you could also get reimbursement for a wide variety of services like:

• Addiction therapy for alcohol and drugs;
• Dental insurance;
• Hospitalizations;
• The cost of nursing home care;
• Counseling for the purpose of reintegration.

Is VA Disability Taxable? Veterans’ Benefits That Are Taxed

The question is often asked: is VA disability income taxable? There are numerous benefits available to veterans, and we will discuss the ones that are taxable and which VA benefits are not taxable. Taxable Veteran benefits include pensions and some severance payments for Veterans who have left the military.

Pension

After serving in the military for at least 20 years, most Veterans are entitled to receive a military pension. For United States veterans, there are two types of retirement pension plans. The first is a regular pension due to honorable retirement. This is not tax-exempt.

The second is a non-service connected pension. Wartime veterans who are 65 or older or have a long-term ailment that is not service-related are eligible for this VA pension. It is not necessary to pay taxes on the non-service connected VA pension. The important point to keep in mind with non-service connected pension is that it is a needs-based program. On the other hand, if you receive that payout because of a war injury, it’s not taxable.

Severance Benefits

Veterans who get lump-sum military severance payments as a result of a medical disability are required to pay taxes on the money. If, on the other hand, you receive that payout because of a war injury, it’s not taxable.

The Combat-Injured Veterans Tax Fairness Act of 2016, which took effect in 2017, implies that your severance compensation is not taxable for the years following this tax law. Under this new federal law, Veterans who have suffered combat-related injuries and have been discharged are exempt from taxation.

For the purposes of receiving a refund, this statute orders the Department of Defense (DoD) to identify Veterans who have been taxed. You may be eligible for a tax refund if you take action now.

Veterans’ Benefits That Are Not Taxed

As you have seen, most VA benefits are not subject to federal income tax. So, what about the biggest VA benefit, VA disability compensation? The list below answers common questions about VA compensation.

Among other instances of VA benefits that are not taxed are:

• Allowances for training, and daily expenses.
• Disability compensation payments (i.e., your service-connected disability pay is not taxable).
• Education and vocational training benefits (like the Post-9/11 GI Bill).
• Grants for wheelchair-accessible housing.
• Veterans who have lost their sight or, in the case of severe injuries like amputations, veterans who have lost the use of their limbs are eligible for grants to purchase motor vehicles.
• Veteran’s endowment policy profits, as well as any other insurance or dividend payments made to Veterans or their beneficiaries.
• Death benefit provided to the family of a deceased soldier who died after September 10, 2001.
• Therapy program payments.
• Any payment made by a state or political entity as a reward for having served in a conflict zone.

So, are VA benefits taxable? The most common VA benefit, disability compensation, is not taxable. VA disability income from disability compensation is not taxable.

Guides on Tax Preparation for Military Personnel

Veterans Affairs (VA) engaged in a Memorandum of Understanding (MOU) with the Internal Revenue Service in 2015. Providing free tax preparation services for Veterans and their families was the major goal. Some of the benefits of this collaboration are listed below:

The IRS Free File Program

The IRS Free File program provides access to all tax forms for free. Free tax software from the IRS and other prominent tax software companies will be available to Veterans making less than $69,000.

The Volunteer Income Tax Assistance Program

Providing free tax preparation for Veterans is the mission of the Volunteer Income Tax Assistance (VITA) program. VITA provides free e-filing for Veterans who need it.

The Earned Income Tax Credit Program

The Earned Income Tax Credit (EITC) is a refundable federal income tax benefit for low to moderate-income employees, and many Veterans are qualified for the credit. The Internal Revenue Service (IRS) estimates that about two million Veterans and military families are eligible for the Earned Income Tax Credit.

The Free Financial Coaching for Veterans Program

This is a free financial coaching program for Veterans offered by the Office of Servicemember Affairs. The program provides Veterans with free one-on-one counseling from licensed financial coaches. They answer questions like “is VA disability taxable?”, “is VA disability income taxable?”, etc.

How Do I Get VA Benefits Tax Assistance?

Veterans get a wide range of benefits from both the federal and state governments, and knowing which ones are taxable may be difficult. If you need help with your military and Veteran tax returns, you should contact a knowledgeable tax expert. An accountant may examine all your sources of income, including your VA disability benefits, and decide what is and is not taxed.

Taxable Considerations When Receiving VA Disability Income

So, if your VA disability income or VA benefits are not taxable, what does the income equate to if you were working? In other words, should you continue to try to work or go for Total Disability Individual Unemployability or TDIU? When analyzing VA IU or TDIU versus working consider the tax effects. Currently, for 2022 the tax rates for a single income tax filer are:

Currently, VA 100 percent disability is paying a little over $3,000 per month. Specifically, the current VA 100% rate is $3,332.06 a month. This means that a veteran receiving the VA 100 percent rating or TDIU would receive $39,984.72 in annual compensation. Therefore, to equal a net (after tax) income of $39,984.72, a veteran would have to have a job that pays at least $50,000 annually. A $50,000 annual salary would be taxed at the 22% tax rate, which means you would pay $11,000 in federal income tax (not to mention state income tax if applicable), and this would mean that your take-home, after-federal-tax income would be $39,000. If you also have to pay state income taxes, you would need to earn even more to equal the tax-free VA disability income of a 100% or TDIU rate.

Therefore the taxable equivalent of VA compensation is equal to having a job that pays at least $50,000 annually (more if you live in a state where there are state income taxes). Thus, unless you have the ability to maintain a job paying at least $50,000 annually, you are better off financially receiving TDIU or VA IU or the 100 percent VA disability compensation.

While we can’t help you file your taxes, we are here to assist you in navigating the VA disability benefits system.

At any stage of your claim, if you disagree with the VA’s decision, contact us online or at 888.878.9350. To establish the strongest possible case, we would be happy to help.