Are Veterans (VA) Disability Benefits Taxable?
What Are VA Disability Benefits?
In order to answer the question “Are my VA disability benefits taxable?” it is important to first define VA disability benefits.
VA disability benefits include:
- Allowances for education and training
- Disability benefits paid to veterans for service-connected disabilities
- Pensions paid to veterans with service-connected disabilities
- 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
- VA compensated work therapy program payments
Is VA Disability Taxed?
The short answer is no, VA disability benefits are not taxed. According to IRS Publication 907, veterans’ disability benefits are not taxable.
Per IRS publications, veterans should not include in their income “any veterans’ benefits paid under any law, regulation, or administrative practice administered by the Department of Veterans Affairs (VA).”
If a veteran is a military retiree who receives disability benefits that do not come from VA, different rules may apply. In certain circumstances, veterans may have to report some or all benefits to the IRS and pay taxes on them. A qualified CPA or tax professional can be helpful in this scenario to help determine any taxes that may need to be paid.
What If I Receive VA Disability Benefits, but Also Work?
VA disability benefits are still tax-free, even if the veteran is working. Employment does not affect the tax treatment of a veteran’s benefits. So long as VA pays and administers the veteran’s disability benefits, the veteran does not have to pay taxes on them. It should be noted, however, that the veteran still must pay taxes on their regular income, regardless of their VA disability benefits.
Am I Entitled to Other Tax-Free Benefits?
In addition to the disability benefits listed above, veterans and their loved ones may be eligible for 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, loss of a limb, or need for regular aid and attendance due to a service-connected disability.
Will My Benefits Still Be Tax-Free if My VA Rating Increases?
Yes, if your VA disability rating is increased, your benefits will remain tax-free. Regardless of a veterans’ rating percentage, all VA disability benefits are tax-free.
In addition, veterans who are granted an increase in their disability rating, which may include a retroactive determination, 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.
Are Lump Sums From VA, or Severance Pay, Taxed?
Veterans who were discharged from their military service on account of a medical disability may receive a one-time lump sum severance payment. Under the Combat-Injured Veterans Tax Fairness Act of 2016, veterans who have combat-related injuries, and were discharged, are not taxed on the one-time lump sum disability severance pay received from the Department of Defense. Specifically, the Department of Defense identifies veterans who were taxed on this sum to ensure they receive an amended tax return to include their refund.
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.)
Tax Filing Resources for Veterans
In 2015, VA partnered with the IRS and entered into a Memorandum of Understanding. The primary purpose of this partnership is to “provide free tax preparation services to Veterans and their families.”
Specifically, several organizations have joined this partnership to provide tax advice and filing services to veterans with low to moderate incomes. Below are some examples of these services:
- IRS Free File—The IRS Free File program makes all tax forms available for free. As of 2021, if the veteran made less than $69,000 during 2019, they qualify for free software provided by the IRS and leading tax software providers. This program can include free federal and state tax return preparation and electronic filing. If the veteran made more than $69,000, they are able to use the Free File Fillable Forms, which are electronic versions of IRS paper forms that may be most beneficial to someone experienced with tax returns.
- Volunteer Income Tax Assistance—Volunteer Income Tax Assistance (VITA) helps prepare free tax returns for veterans. VITA offers free electronic filing.
- Tax Counseling for the Elderly—This resource is much like VITA, however, it is mainly for people aged 60 years or older. Specifically, this resource helps focus on tax issues unique to seniors.
- Earned Income Tax Credit—As mentioned earlier, many veterans are eligible for the Earned Income Tax Credit, which is a refundable federal income tax credit for low to moderate-income workers. According to the IRS, roughly two million veterans and military households receive the Earned Income Tax Credit.
- Free Financial Coaching for Veterans—The Bureau of Consumer Financial Protection, Officer of Servicemember Affairs offers a Financial Coaching Initiative that assists Veterans with their financial goals. The program offers advice from certified financial coaches who provide free individualized support services.
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 unnecessary taxes on income, or, perhaps worse, fail to pay taxes on income and receive 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 or are having trouble becoming service-connected for your disability, CCK may be able to help. Contact our office today for a free case review by calling 800-544-9144.
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