Are Your Veteran Benefits Taxable?

After you leave the military, your Veteran benefits can play a key role in helping you enjoy life as a civilian. You may receive a variety of benefits, from a pension to disability compensation to the GI Bill. But when tax season rolls around, you may be wondering if those benefits will be taxed.

Whether your VA benefits are taxable depends on which benefits you receive and your circumstances, which is why it’s always a good idea to consult a tax professional about your situation. The following information can also help you understand when you may—or may not—owe taxes on your benefits.

Is military retirement taxable?

Military retirement pay is fully taxable. Pensions you receive based on your age or length of service are also taxable, and you must report the amount you receive as pension income for the year. However, if your retirement pay is reduced to provide an annuity for a spouse or other survivor, you’re not required to include that amount in your income.

Are VA disability benefits taxable?

The disability benefits you receive from the Department of Veterans Affairs aren’t taxable, so you don’t need to include them as income on your tax return. Tax-free disability benefits include:

• 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
• benefits under a dependent care assistance program

If the VA increases your disability rating, you may be eligible to claim a federal tax refund in the year when the VA takes the action. If you’re a combat-disabled Veteran being granted Combat-Related Special Compensation (CRSC) after an award for Concurrent Retirement and Disability, you may be eligible for a tax refund in the year the CRSC is granted.

GI Bill Veteran tax benefits

All versions of the GI Bill, including the Post-9/11 GI Bill and the Montgomery GI Bill, provide tax-free benefits for higher education, including undergraduate and postgraduate study as well as vocational training. You don’t have to report these benefits as income on your tax return.

If you qualify, you can claim tax credits such as the Lifetime Learning Credit or the American Opportunity Tax Credit in addition to using the applicable GI Bill for education expenses. However, your credit will be reduced for any money the GI Bill contributes toward your tuition and fees. For example, if your tuition bill is $8,000 one year and the GI Bill pays for $6,000 of it, your credit would be based on the $2,000 you paid yourself.

In addition, the SECURE Act 2.0 introduced new tax benefits for Veterans. Service-disabled Veterans who return to federal employment can now receive both their full salary and VA disability payments without reduction (salary remains taxable, disability remains tax-free). The law also allows for special retirement plan distributions for certain disabled Veterans and increased catch-up contribution limits for Veterans in federal service.