After you leave the military, veterans benefits may play a key role in helping you enjoy life as a civilian. You may receive a variety of benefits, from a pension to disability compensation to the GI Bill. But, like many veterans, an important question might have occurred to you about how to handle your taxes: Are VA benefits taxable?
The answer isn’t as simple as the question. Whether or not your VA benefits are taxable depends on which benefits you receive and what your circumstances are. It’s always a good idea to consult a tax professional about your individual circumstances. However, the following general information can help you understand when you may—or may not—owe taxes on your benefits.
Military Retirement Pay
Military retirement pay is fully taxable. If you receive a pension based on your age or length of service, it’s taxable. You must report the amount you receive as pension income for the year. However, if your retirement pay is reduced to provide an annuity for a spouse or other survivor, don’t include that amount in your income.
VA Disability Benefits
Disability benefits you receive from the Department of Veterans Affairs aren’t taxable. You don’t need to include them as income on your tax return. Tax-free disability benefits include:
- Disability compensation and pension payments for disabilities paid either to veterans or their families
- Grants for homes designed for wheelchair living
- Grants for motor vehicles for veterans who lost their sight or the use of their limbs
- Benefits under a dependent-care assistance program
If the VA increases your disability rating, you may be eligible to claim a federal tax refund in the year when the VA takes the action. If you’re a combat-disabled veteran being granted Combat-Related Special Compensation (CRSC) after an award for Concurrent Retirement and Disability, you may be eligible for a tax refund in the year the CRSC is granted.
The Combat-Injured Veterans Tax Fairness Act of 2016 aims to provide tax refunds to an estimated 130,000 disabled veterans who improperly had taxes withheld from their disability severance payments. The Department of Defense mailed letters in July 2018 to notify affected veterans that they should file amended returns to receive their refunds.
GI Bill Education Benefits
All versions of the GI Bill, including the Post-9/11 GI Bill and the Montgomery GI Bill, provide tax-free benefits for higher education, including undergraduate and postgraduate study as well as vocational training. You don’t have to report these benefits as income on your tax return.
If you qualify, you can claim tax credits such as the Lifetime Learning Credit or the American Opportunity Tax Credit in addition to using the applicable GI Bill for education expenses. Note that if you do, your credit will be reduced for any money the GI Bill contributes toward your tuition and fees. For example, if your tuition bill is $5,000 one year, and the GI Bill pays for $4,000 of it, your credit would be based on the $1,000 you paid yourself.
- Make a comprehensive list of the benefits you receive as a veteran. Denote which ones are taxable and which ones aren’t.
- Keep a record of all the taxable veterans benefits you receive, so you’re prepared for tax season.
- Explore Navy Federal’s Tax Center for help on filing your annual income taxes as a retired servicemember. Contact a tax professional for more comprehensive assistance.
This content is intended to provide general information and shouldn't be considered legal, tax or financial advice. It's always a good idea to consult a tax or financial advisor for specific information on how certain laws apply to your situation and about your individual financial situation.