No, veterans disability is not considered income for tax purposes.
What does the IRS say about veterans’ disability benefits?
The Internal Revenue Service (IRS) excludes disability benefits from gross income for federal income tax purposes. Publication 907 – Tax Highlights for Persons with Disabilities, instructs disabled veterans not to include VA disability benefits in their gross income on their federal tax returns, specifically:
- Allowances for education, training, and subsistence.
- Amounts received as disability compensation and disability pension (paid to the veteran or the veteran’s family).
- Dependent-care assistance programs benefits.
- Grant money received for a motor vehicle, when the veteran has lost sight or use of limbs.
- Grant money received for a wheelchair-accessible home.
- Proceeds and dividends of VA insurance, paid to the veteran or to beneficiaries. This includes endowment policy proceeds paid before death, as well as interest on insurance dividends that are left on deposit with the VA.
- VA compensated work therapy program payments.
What types of tax-free VA monetary benefits are there?
There are three types of tax-free VA monetary benefits available to veterans who became disabled because of an injury or illness related to active military service. Military veterans can also get VA disability benefits for disabilities that are related to military service, even if the disability does not become apparent until after service has ended.
The three types of tax-free VA disability benefits are:
- Disability Compensation: Paid to the veteran
- Dependency and Indemnity Compensation (DIC): Paid to the surviving spouse, child, or parent of a veteran who died from service-related disabilities
- Special Monthly Compensation (SMC): An additional amount paid to veterans, their spouses, surviving spouses, and parents. This is intended to help with costs of specific disabilities, such as loss of a limb, or special circumstances that require another person to help the disabled veteran.
Are there any special rules about military disability pensions?
There are some exceptions to the rule. These exceptions and special circumstances include:
- If your disability pension is based on years of service, you must include it as income, but you can deduct the portion of the pension based on a qualifying service-connected disability.
- In addition to the general rule of VA disability benefits not counting as taxable income, the IRS specifically excludes disability payments received for injuries that resulted directly from a terrorist attack or military action from being counted as taxable income.
Can my veterans disability benefits count toward an Earned Income Tax Credit?
No. Because the IRS does not consider VA disability benefits as income, they cannot count as earned income for purposes of the Earned Income Tax Credit (EITC).
You cannot use veterans disability benefits to qualify for EITC, but some other types of non-military disability retirement benefits can qualify.
Can I get a tax refund if I am a disabled veteran?
Possibly. The IRS page, Special Tax Considerations for Veterans, explains situations in which a disabled veteran may be eligible for a federal tax refund.
You might be able to claim a refund if the Department of Veterans Affairs increases your disability percentage or you apply for and receive Combat-Related Special Compensation (after receiving an award for Concurrent Retirement and Disability).
How can I get help?
The process for obtaining veterans disability benefits is rarely ever easy., but you do not need to go through it alone. The veterans disability lawyers in Ralegh at Lunn & Forro, PLLC can answer all your questions about veterans disability. We can also help you navigate the process and get you the compensation you deserve for serving your country.
And we do all this with no upfront out-of-pocket costs from you. But do not wait too long to apply; while the Department of Veterans Affairs may award you back benefits from the time you applied, you are not eligible for benefits for any time before you applied. This is true even if you were disabled for a full year before you applied.
Schedule a free consultation with us today: 888-966-6566. For answers to any pressing questions, read through our veterans disability FAQs.