After a veteran has their VA disability benefits application approved, they can begin receiving monthly payments to compensate them for disabling medical conditions caused by their military service. But do veterans owe income taxes on the disability benefits they receive from the VA?
General Rule: VA Disability Benefits Are Not Taxable
By default, the Internal Revenue Code exempts many kinds of VA benefits from income taxation, including:
- Monthly disability benefits
- Grants for home purchases or renovations to support wheelchair living
- Grants for motor vehicles adapted to the loss of use of limbs
- Benefits from dependent-care assistance programs
Federal law considers VA disability benefits as a benefit for a veteran who has developed a disability due to their military service, rather than as income or other compensation for service. As a result, a veteran who receives VA disability benefits does not need to report those benefits on their tax returns. States that impose income taxes also consider VA disability benefits as exempt from income taxation.
Types of VA Benefits That Are Tax-Free
Examples of VA benefits excluded from taxable income include:
- Disability benefits
- VA education benefits
- Lump-sum disability severance payments paid by the DoD to veterans separated from the military due to combat-related injuries; veterans who paid taxes on these payments can file an amended return to request a refund of taxes paid on those payments
Situations Where Taxation Comes Into Play
Taxation can play a role in certain types of VA compensation or benefits, such as:
- Refunds for VA compensation: A veteran may claim a federal tax refund after receiving an increase in their VA disability rating, including a retroactive increase in rating, or combat-related special compensation paid for concurrent retirement and disability.
- Earned Income Tax Credit: Some veterans may qualify for the EITC, which can provide money back even if a veteran did not owe taxes or does not have to file a tax return.
- Child Tax Credit: Veterans with qualifying children, including those who entitle a veteran to increased monthly disability benefits, may claim the Child Tax Credit to receive a refund from the federal government.
Common Misconceptions About VA Disability and Taxes
Common misconceptions and errors that veterans make regarding disability benefits and taxes include:
- Veterans may mistakenly include VA disability benefits they received in the income they report on their annual tax returns.
- Some veterans may equate VA disability benefits with Social Security disability benefits, as SSD benefits can become taxable under certain circumstances.
- Veterans may assume that receiving VA disability benefits can disqualify them for other tax-free benefits.
- Veterans may not file for tax refunds or credits they become eligible for after receiving particular kinds of VA compensation or when they have children or dependents.
How Veterans Can Protect Their Benefits
Veterans can ensure they receive the maximum benefits owed to them under VA regulations by taking specific steps, such as:
- Keep copies of official documentation from your VA disability benefits application, including the official notice of your disability rating and receipts of payment of your monthly benefits.
- Work with tax professionals to ensure you do not include tax-free VA benefits in your reported income.
- Consult your tax professional about your tax obligations if you receive both VA disability benefits and other financial payments from the VA or the DoD, such as pensions or retirement pay.
Contact a VA Disability Lawyer Today
When you get approved for VA benefits, you may have questions about whether you owe taxes on those benefits. Contact Veterans Law Attorneys today for a free, no-obligation consultation with a VA disability lawyer to learn more about the taxability of benefits you receive from the VA.
