“The IRS does not consider veteran’s disability benefits taxable for purposes or federal income taxes. Your benefits can, however, count as income for other purposes, such as child support or alimony.”
If you are a veteran receiving veteran’s disability benefits, you might wonder, Are veteran’s disability benefits considered income? The short answer is yes and no. The IRS does not consider veteran’s disability benefits taxable for federal income taxes. Your benefits can, however, count as income for other purposes, such as child support or alimony.
What Types of Veteran’s Benefits are Tax-Free?
If you became disabled because of an injury or illness you suffered during active military service, or because yours pre-existing condition became worse from an injury or illness, while you were in active military service, you or your loved ones may be eligible for one or more of these tax-free veteran’s benefits:
- Disability Compensation – a cash payment made directly to the veteran
- Dependency and Indemnity Compensation (DIC) – a cash payment to the surviving spouse, child, or parent of a veteran who died from service-related disabilities
- Special Monthly Compensation (SMC) – a supplemental amount, besides the standard disability compensation for specific disabilities. The veteran, spouse or parents can receive this payment to help defray expenses incurred because of a veteran who lost a limb or had some other severe injury, or with special circumstances that make it necessary for another person to assist the disabled veteran with daily living functions.
Are Military Disability Pensions Taxable?
Although military disability benefits generally are not countable as income for tax, there are interesting things you must know about the taxability of veteran’s disability benefits. IRS Publication 907 contains additional details about these items.
If you receive military disability payments for having served in the armed forces of a country other than the United States, your benefits qualify for tax-free treatment. The rule that provides these payments not be included in your gross income is not limited to people who served in the United States military.
Some military disability pensions are based on years of service. If you find yourself in this position, only the portion that arises from a qualifying service-related disability will be free from taxation. The remainder of your disability pension will count as taxable income.
If you receive disability payments because you suffered injuries directly from a military action or a terrorist attack, these benefits are not considered income for federal income tax. This is in addition to the standard tax-free veteran’s disability compensation.
What Does the IRS Exclude from Gross Income for Disabled Veterans?
The IRS does not require veterans to include these VA disability benefits as gross income on their federal tax returns:
- Work therapy program payments that the VA compensates.
- Education, subsistence, and training allowances.
- Benefits received through dependent care assistance programs.
- Disability compensation and disability pension paid to you or your family, except as explained earlier in this article.
- If you have lost your sight or the ability to use your arms or legs, do not include grant money you receive for a motor vehicle.
- Grant money you get for a wheelchair-accessible home.
- VA insurance proceeds and dividends paid to you or your beneficiaries. Endowment policy proceeds paid before death and interest on insurance dividends left on deposit with the VA, also fit into this category.
Benefits and regulations can be different in every state, so talk with an elder law attorney in your area.
U.S. Department of Veterans Affairs. “Compensation.” (accessed April 19, 2018) https://www.benefits.va.gov/compensation/
IRS. “Publication 907: Tax Highlights for Persons with Disabilities.” (accessed April 19, 2018) https://www.irs.gov/pub/irs-pdf/p907.pdf