Are Veterans Benefits Taxable?
November 11, 2016 : Monica Welsh – The Tax Institute
Each year on Veterans Day, our country honors men and women who served in our military. At H&R Block, we think about our veterans on this day as well – not only as we honor their service but also how we can help educate the various tax implications for veterans.
So, are veterans benefits taxable? Here’s a list of benefits a veteran may receive once they have retired from duty, and how each of those benefits will be treated for tax purposes:
Military Retirement Pay
If you receive military retirement pay – which is based on age or length of service – it is taxable and is included in your income as pension. If there is a reduction in your retirement pay to provide a survivor annuity under the Survivor Benefit Plan (SBP), that amount should not be included in your income.
Military Retirement Disability Pay
If you receive disability retirement pay as a pension, annuity or similar allowance for personal injury or sickness, you may be able to exclude the payments from your income. You can exclude the disability payments from your taxable income if any of the following conditions apply:
- You were entitled to receive a disability payment before September 25, 1975;
- You were a member of a listed government service or its reserve component, or were under a binding written commitment to become a member, on September 24, 1975;
- You receive the disability payments for a combat-related injury. This is a personal injury or sickness that;
- Results directly from armed conflict,
- Takes place while you are engaged in extra-hazardous service,
- Takes place under conditions simulating war, including training exercises such as maneuvers, or;
- Is caused by an instrumentality of war.
- You would be entitled to receive disability compensation from the Department of Veterans Affairs (VA) if you filed an application for it. Your exclusion under this condition is equal to the amount you would be entitled to receive from the VA as disability compensation.
Veterans Affairs (VA) Benefits
If you can exclude from income any VA benefits you receive – like benefits paid under any law, regulation, or administrative practice by the VA. Some examples of VA benefits include:
- Education, training, and subsistence allowances.
- 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.
- Veterans’ insurance proceeds and dividends paid either to veterans or their beneficiaries, including the proceeds of a veteran’s endowment policy paid before death.
- Interest on insurance dividends left on deposit with the VA.
- Benefits under a dependent-care assistance program.
- The death gratuity paid to a survivor of a member of the Armed Forces who died after September 10, 2001.
- Payments made under the compensated work therapy program.
- Any bonus payment by a state or political subdivision because of service in a combat zone.
The military provides veteran unemployment compensation under certain programs for ex-military personnel. Unemployment compensation received under these programs is treated the same as any other unemployment benefits, and is taxable to you as a recipient.
Unfortunately, veterans’ benefits do not qualify as earned income for the Earned Income Tax Credit (EITC). Therefore, if the only income you receive would be classified as veterans benefits, you would not have any earned income to qualify you for the EITC.
We hope we answered common questions, like “Are veterans benefits taxable?” For more questions on tax benefits, credits or deductions connect directly with a tax professional.