Veterans of the U.S. military can receive a wide variety of retirement and disability tax benefits. But many veterans struggle to sort out the various types of income that they may receive. Some types of income are fully taxable while others are tax-free. Here’s what you need to know about VA benefits and how they are taxed.
Types of Veteran Benefits You Can Receive
There are two main types of VA benefits: cash and discounts.
Cash benefits are monthly payments from the government for retirement and disabilities you incurred from your military service. If you’ve been permanently and totally disabled, you can also qualify for Social Security disability benefits.
Veterans are also privy to discounts on mortgages, income tax preparation, groceries from the commissary, financial coaching, and educational benefits with the GI Bill.
Taxable Veteran Benefits
Three main groups of veteran benefits are taxable: retirement pay, certain disability benefits, and unemployment compensation for ex-servicemembers (UCX).
Retired members of the U.S. military are generally eligible to receive a military pension after at least 20 years of service. There are two distinct retirement pension systems. Both are taxed as pensions:
- Legacy high-3 system: Your pay is based on 2.5% of the 36 highest months of basic pay.
- Blended retirement pay: Your pay combines an annuity payment (2% to 2.5% per year served), matching contributions to your Thrift Savings Plan, and mid-career bonuses.
You’ll enter your pension payments for the year on lines 5a and 5b of Form 1040 or Form 1040-SR. You won’t have to pay federal taxes on any part of your pension that you use for a survivor annuity for your spouse or children. Military retirement pay is not counted as earned income, either, so you won’t pay FICA taxes (Social Security or Medicare taxes).
Twenty states and Washington D.C. either partially or fully tax military retirement pay, causing veterans to pay tax on both the federal and state levels.
Disabled Veteran Benefits
Veterans who receive lump-sum severance payments due to a medical disability must pay taxes on the payment. However, that payment isn’t taxable if you receive it for combat-related injuries or the VA tells you the payment is not taxable. Taxable severance pay will be included on your W-2, and your employer should withhold state and federal taxes for you.
The Combat-Injured Veterans Tax Fairness Act of 2016 allows certain veterans to receive retroactive refunds for taxes paid on severance payouts for combat-related injuries.
Unemployment Compensation for Ex-Servicemembers (UCX)
Servicemembers who leave the military might have a hard time finding work as they make the transition to civilian life. To help tide veterans over during this period, the military offers unemployment compensation for UCX that’s administered at the state level. This unemployment income is taxable. You’ll receive a Form 1099-G for this income, and you’ll enter on a Schedule 1 when you do your taxes.
Nontaxable Veterans Benefits
The majority of VA benefits are exempt from taxation. Tax-free benefits include:
- Certain disability compensation
- Disability pension
- Benefits related to education or vocational training (like the Post-9/11 GI Bill)
- Housing grants for homes designed for wheelchair living (Specially Adapted Housing [SAH] grants may qualify)
- Group-term life insurance
- The Compensated Work Therapy (CWT) program
Other Possible Tax Benefits
Several states provide additional tax breaks for disabled veterans. For example, the state of California waives property taxes for veterans who are 100% disabled and meet certain income and home-appraisal limits. Other state-related benefits for disabled veterans can be found via the VA’s list of state-level veterans benefits websites.
How Do I Get Tax Help for My VA Benefits?
With the plethora of benefits for veterans at both the federal and state levels, determining which benefits are taxable can be challenging. A qualified tax professional who specializes in military and veteran tax returns can be of great help if you need assistance.
If you want free help, you can use Military OneSource, a wide-ranging website with information about free military tax filing through MilTax and contact information for MilTax consultants. Also, veterans can get free help from the IRS’ Volunteer Income Tax Assistance (VITA) program.