In this article about VA Disability benefits and taxes:
- Taxes and VA Disability Benefits
- Is Back Pay for VA Disability Taxable?
- Other Non-Taxable VA Benefits
- What VA Benefits Are Taxable?
- Do VA Disability Benefits Qualify for the Earned Income Tax Credit?
- Woods and Woods Is a VA Benefits Attorney
Taxes and VA Disability Benefits
When the VA issues disability payments to veterans, it does not deduct federal, state, Social Security, or Medicare taxes. So, should you claim VA disability benefits on your taxes?
There are limited circumstances that would allow a veteran who is collecting disability payments to receive a federal tax refund. Veterans may be eligible for a federal refund only for the year that they:
- received an increased disability rating, including any retroactive awards or
- were granted Combat-Related Special Compensation (CRSC) after being awarded Concurrent Retirement and Disability
In those instances, the veteran would file an amended return (IRS Form 1040-X).
Is Back Pay for VA Disability Taxable?
No. VA disability beneficiaries are also exempt from paying taxes on back pay.
Other Non-Taxable VA Benefits
The following VA benefits are also excluded from federal taxable income:
- 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 you leave 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
If you receive any of these benefits, you are not required to claim them on your tax return. The IRS automatically applies the tax breaks for them.
What VA Benefits Are Taxable?
Military Retirement Pay
Military retirement pay is taxable. It must be included in your gross income as a pension when filing your taxes.
Unemployment Compensation for Ex-Service Members (UCX) helps veterans move from military service to the civilian labor market. The program is managed through the Department of Labor. Compensation that is received under this program is treated the same as all other unemployment benefits and is taxable.
Be careful not to confuse the UCX program with individual unemployability (IU) benefits. They are not the same.
Military Retirement Disability Pay
Military Disability Retirement Pay, a program administered by the Department of Defense, is considered taxable income except when the service member:
- was entitled to receive a disability payment before September 25, 1975
- was a member of the military (active or reserves) or were under a binding written commitment to become a member on September 24, 1975
- receive disability payments for a combat-related injury
- would be entitled to receive disability compensation from the VA if they filed an application for it
One of our VA disability lawyers talks about what we do when we appeal your case to the VA.
Do VA Disability Benefits Qualify for the Earned Income Tax Credit?
Veterans disability benefits do not qualify as earned income for the Earned Income Tax Credit (EITC). If the only income you receive is classified as veterans disability benefits, you will not have any earned income to report and would not qualify for EITC.
Woods and Woods Is a VA Benefits Attorney
Wood and Woods can’t help you file your taxes, but we are here to help you navigate the complex VA disability benefits system.
If you are just getting started with the VA claims process or if you disagree with the VA’s decision on your claim, call us. A VA benefits appeal attorney will be a great partner for building the strongest case possible.
Talk to Us About Your Claim: (866) 232-5777
Frequently Asked Questions
No. Your monthly disability payments are not considered taxable income. Neither is disability back pay.
Individual unemployability and Combat-Related Special Compensation are not taxable. More non-taxable benefits are listed above.