Does VA Disability Count as Income?
What Is VA Disability?
The U.S. Department of Veterans Affairs (VA) disability compensation is a monthly monetary benefit paid to veterans who are disabled by an injury or illness incurred in or aggravated by military service. Veterans are eligible for disability compensation if they have a qualifying condition for which they are service connected.
To qualify for VA disability benefits, veterans typically need evidence of the following three things:
- An in-service event, injury, or illness;
- A current diagnosis by a medical professional; and
- A medical nexus, or link, between the in-service event, injury, or illness and your current diagnosis.
Veterans can submit a claim for VA disability benefits using VA Form 21-526EZ. This can be submitted via mail to the Evidence Intake Center or electronically through VA’s website.
Is VA Disability Considered Income?
According to the Internal Revenue Service (IRS), VA disability is not considered income. Therefore, veterans should not include disability benefits paid by VA in their gross income when filing taxes.
Examples of VA payments that are not taxable include:
- Disability compensation and pension for veterans and their families
- Allowances for education and training
- Benefits to pay for wheelchair-accessible housing
- Automobile allowances or grants for adaptive equipment for vehicles
- Insurance proceeds paid to veterans or their beneficiaries
- Dividend interest on VA-held deposits
- Assistance for dependent care
- Death gratuities paid to survivors of military veterans killed after September 11, 2001
If a veteran is a military retiree who receives disability benefits separate from VA, different rules may apply. Additionally, in certain circumstances, veterans may have to report some or all benefits to the IRS and pay taxes on them. In this scenario, a qualified CPA or tax professional can help determine if there are any taxes that need to be paid.
It is also important to note that veterans who are granted an increase in their disability rating, or veterans who have been granted Combat-Related Special Compensation after an award for Concurrent Retirement and Disability, may be eligible to claim a federal tax refund.
What If I Receive VA Disability Benefits, but Also Work?
If a veteran is working, VA disability benefits are still not considered income. Employment does not affect the tax treatment of a veteran’s benefits. However, veterans must report their regular income.
To learn about organizations that provide tax-filing resources to veterans, please consult Are Veterans (VA) Disability Benefits Taxable?
Other Tax-Free VA Benefits
In addition to the disability benefits listed above, the following VA benefits also do not count as income for tax purposes:
- Dependency and Indemnity Compensation (DIC) – Surviving spouses, children, and parents who receive DIC from VA do not have to report their monthly payments as income.
- Special Monthly Compensation (SMC) – Veterans who receive SMC from VA do not have to report their SMC payments as income.
Are Lump Sum Severance Payments Considered Income?
Veterans who were discharged from their military service due to a disability may receive a one-time lump sum severance payment from the Department of Defense (DoD). According to the Combat-Injured Veterans Tax Fairness Act of 2016, this lump sum payment is not taxed.
In the case that a veteran is taxed on their severance payment, the veteran should file an amended return to receive a refund.
Can VA Disability Count Toward the Earned Income Tax Credit (EITC)?
The Earned Income Tax Credit (EITC) assists Americans with low to moderate income by offering them a refundable tax credit. Unfortunately, since VA disability compensation is not considered income by the IRS, VA benefits do not count toward the EITC. Military pension also does not count toward the EITC.
However, other sources of income separate from VA can qualify a veteran for EITC. It is also important to note that receiving a portion of income from VA does not reduce or eliminate a veteran’s tax credit.
Have a Question About Your Disability Benefits?
Chisholm Chisholm & Kilpatrick LTD is nationally recognized for helping disabled veterans secure the benefits they deserve. If VA denied you disability compensation or assigned you an inadequate rating, CCK may be able to help. Call us today at 800-544-9144 to schedule a free consultation.
