Veteran Income and Taxes

Tax season can feel unnecessarily complicated for veterans and military families. Between VA benefits, military retirement pay, survivor benefits, and state-specific rules, it is not always clear what income must be reported and what does not.

The good news is that many veteran benefits are tax-free, and understanding the difference can help to avoid mistakes, reduce tax bill, and may even reclaim money.

Here is a breakdown of what veterans should know about taxes:

Understanding Taxable vs. Non-Taxable Veteran Income

The IRS treats military and veteran income differently depending on where the money comes from. Some payments are considered earned or retirement income, while others are classified as compensation for injury or service-connected disability. It is important to know the distinction.

What Is Taxable for Veterans?

Retirement from the military based on years of service is generally taxable at the federal level. NOTE: Military retirement pay is different from VA disability compensation and taxed differently.

▪        You will receive Form 1099-R

▪        The income must be reported on the federal tax return

▪        State taxation varies

Survivor Benefit Plan (SBP) Payments

Survivors receiving SBP annuity payments should be aware that these payments are usually taxable.

▪        Federally taxable

▪        May be state taxable depending on local laws

What Is Not Taxable for Veterans?

VA disability compensation, including monthly disability payments and retroactive disability awards, is tax-free.

▪        Not taxable at the federal level

▪        Not taxable in most states

▪        Does not need to be reported as income

Other Tax-Free VA Benefits

Many additional VA benefits are also excluded from taxable income. These benefits are excluded under IRS rules and do not increase tax liability.

▪        VA disability pensions

▪        GI Bill and other VA education benefits

▪        Special Monthly Compensation (SMC)

▪        Grants for specially adapted housing

▪        VA vehicle grants for disabled veterans

State Taxes

Always check your state’s current tax code, as laws change frequently. States fall into three general categories:

▪        No state income tax (e.g., Texas, Florida, Nevada)

▪        Partial exemptions

▪        Fully taxable

Property Tax Benefits for Veterans

Many states and counties offer property tax exemptions or reductions for veterans, especially those with service-connected disabilities. Benefits may depend on:

▪        Disability rating

▪        Age

▪        Income

▪        Wartime service

▪        Residency length

Understanding these rules can help protect the benefits earned through service. A little clarity goes a long way. Read the full article here.