The Department of Veterans’ Affairs (VA) offers several financial benefits to veterans and their families who qualify for specific programs. When you receive more than one type of VA benefit, it can be confusing to understand which ones are taxable and non-taxable. The Internal Revenue Service (IRS) does tax certain VA benefits, such as retirement pay. When it comes to VA benefits, however, “Is VA disability taxable?” is one of the most common questions that veterans and their families ask.
Are VA Disability benefits taxable?
The VA issues disability checks to eligible veterans without deducting federal, state, social security, or Medicare taxes. When filing your federal tax return for the previous year, the IRS does not require you to claim VA disability as part of your gross income.
Which Disability Benefits Are Tax-Free?
In addition to receiving tax-free disability payments, the IRS also does not require disabled veterans to pay taxes on the benefits indicated below.
- VA grants used to make a home more accessible for veterans who use a wheelchair.
- VA grants used to design a specialty vehicle for veterans who lost their sight or the use of one or more of their limbs.
- Benefits received under the VA dependent-care assistance program.
You do not have to file any type of tax paperwork with your federal return if you receive any of these tax-free disability benefits. The IRS knows that disability benefits are free to veterans and applies the tax break automatically.
What If Your Disability Rating Increases?
You may be eligible to file for a federal tax refund if the VA increases the percentage of your disability rating. This situation also applies to retroactive disability benefits rating determinations. Another instance when you may be eligible for a federal tax refund is when you receive Combat-Related Special Compensation after receiving an award for Concurrent Retirement and Disability. The IRS requires you to file an amended tax return in either case.
When filing your amended tax return, be sure to use IRS Form 1040X titled Amended U.S. Individual Income Tax Return. The IRS will use this form to correct a previously submitted Form
1040, Form 1040A, or Form 1040EZ. You will need to send your amended tax return form to the IRS by mail since it does not accept this form electronically. Be sure to include all VA documents along with anything you received from the Defense Finance and Accounting Service to explain your reason for filing the amended tax return.
You would not need to file Form 1040X if the Defense Finance and Accounting Service sent you Form 1099-R that indicates the correct taxable portion of your income. Receipt of this form means that adjustments for non-taxable awards have already occurred.
What Other Tax Benefits Are Available to Disabled Veterans?
The IRS does not tax VA education benefits, and you do not have to file any special paperwork to receive the tax break on your tuition, books, and other expenses. You can learn more about VA education benefits by reading IRS Publication 970 titled Tax Benefits for Education since certain limits and exclusion apply.
Federal and state government offer additional tax breaks to disabled veterans, such as property tax benefits. The specific benefit you receive depends on where you live. In Florida, for example, a veteran with a minimum 10 percent disability rating can receive a property tax deduction of up to $5,000. That state provides a full property tax exemption for veterans with a 100 percent disability rating. You can find the disabled veterans property tax exemption for your state at the website MilitaryBenefits.info. Other non-taxable VA benefits include:
- Bonus payments received from a political or state subdivision related to the veteran’s service in a combat zone.
- Death gratuity benefits paid to an Armed Forces survivor who died any time after September 10, 2001.
- Insurance dividends and proceeds paid to veterans or beneficiaries of the policy. This includes any proceeds paid by a veterans’ endowment policy that the veteran received prior to death.
- Interest paid on insurance benefits the veteran left on deposit with the VA.
- Payments received from the veterans compensated work therapy program.
Tax Resources for Veterans
In 2015, the IRS and VA created a Moratorium of Understanding with a primary focus on providing veterans and their families with free tax preparation services. Several other organizations joined the Moratorium of Understanding to offer their tax advice and services to both veterans and low-income individuals and families. Examples of these resources include:
- IRS Free File offers free tax software to single and married filers with an income less than $69,000 as of December 31, 2019.
- If you are at least 60 years old, you may qualify for free electronic tax filing through the Volunteer Income Tax Assistance (VITA) Program or Tax Counseling for the Elderly (TCE) Program. Program volunteers have received training directly from the IRS. The American Association of Retired Persons (AARP) works with TCE through its own program called AARP Tax-Aide.
- Low and moderate income veterans may qualify for the Earned Income Tax Credit (EITC) on their federal tax return. You could also qualify to receive the Child Tax Credit. You can learn more about both tax credits and how they help military families by watching this short YouTube video.
- The Office of Service Member Affairs associated with the Bureau of Consumer Financial Protection provides free financial coaching for veterans. You can use this link to find a financial coach in your community trained to work with the unique financial needs of veterans.
Hill and Ponton is Available as an Additional Resource
You served the United States well while in the military, and these tax breaks are just one small way your country can show its appreciation. Please don’t hesitate to reach out to us with your inquiries regarding eligibility for VA disability pay. You may contact our main office at 888-373-9436!
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