Veterans disability benefits are not taxable, according to IRS Publication 907.
What Counts as Veterans Disability Benefits?
According to the IRS, you should not “include in your income any veterans’ benefits paid under any law, regulation, or administrative practice administered by the [Department of Veterans Affairs (VA)].” These benefits include:
- Allowances for education and training
- Disability benefits and pensions paid to veterans with service-connected disabilities
- Benefits to pay for wheelchair-accessible housing
- Grants to pay for motor vehicle adaptations for drivers with limited to no use of their limbs or who lost their sight
- 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
- VA compensated work therapy program payments
If you are a military retiree who receives disability benefits that do not come from the VA, different rules apply, and in certain circumstances, you might have to report some or all these benefits to the IRS and pay taxes on them. A qualified CPA or tax professional can examine your benefits in this scenario and determine what portion, if any, on which you must pay taxes.
What If I Receive VA Disability Benefits but Also Work?
The fact that you are working and also receiving VA disability does not affect the tax treatment of your benefits. As long as the VA pays and administers your disability benefits, you do not have to pay taxes on them.
(Note: You must pay taxes on your regular income regardless of whether you receive VA disability.)
What Types of Tax-Free Benefits Am I Entitled To?
In addition to the disability benefits you receive monthly, you or a loved one might also be entitled to the following tax-free benefits:
- Dependency and Indemnity Compensation: This is available if you are the surviving spouse, child, or parent of a veteran who died from a service-related injury or illness.
- Special Monthly Compensation: This is additional compensation that helps cover certain disabilities such as the loss of sight or loss of a limb or need for regular aid and attendance due to a service-connected disability.
Do My VA Disability Benefits Count Toward the Earned Income Tax Credit (EITC)?
The earned income tax credit (EITC) is a refundable tax credit for low-income Americans that, in some cases, enables you to receive a tax refund that exceeds what you paid in taxes throughout the year.
However, even though you “earned” your VA disability benefits with your military service and the disability you suffered on behalf of the country, these benefits are not earned income and therefore do not count toward the EITC. Military pension also does not count towards the EITC.
However, if you have other income that qualifies you for the EITC, the fact that you earn VA disability does not reduce or eliminate your tax credit.
(Note: You may qualify for the EITC if you are permanently and totally disabled.)
What If I Have More Questions About the Tax Treatment of My VA Disability Benefits?
The tax code is known for being complex and hard to understand, and even the sections that seem straightforward can feature loopholes and caveats.
Thus, if you receive different forms of income that have different tax treatments, it is a good idea to speak with a qualified CPA or tax preparer before you file taxes each year. The last thing you want is to pay taxes on income when you did not have to, or, perhaps worse, not pay taxes on income and get a bill at a later date for those taxes plus penalties and interest.
An accountant can review all your income sources, including your VA disability benefits, and determine what is and is not taxable.
Have Questions About Your VA Disability Benefits? Speak with the Legal Team at Chisholm Chisholm & Kilpatrick LTD.
If you have received an unfavorable decision from the VA, our legal team is here to help. Call 800-544-9144 for a free consultation.
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