Is VA Disability Taxable? – Federal Taxes on Veterans Disability

If you’re worried whether VA disability is taxable income, be reassured that most benefits from the VA are tax-free. Veterans benefits meant to cover losses like education grants or ADA-compliant home renovations fall under non-taxable income.

Even so, there are exceptions, especially when receiving benefits outside of the VA like Social Security.

If you need expert legal help with your individual case, reach out to LegalASAP’s network of highly skilled VA-accredited attorneys. Be sure you’re receiving all the benefits and tax refunds you deserve.

Which Veterans Benefits are Taxable?

There are some types of veterans benefits you may receive after service that may be subject to taxes. Examples of such may include:

• Military retirement pay
• Military disability retirement pay

Military retirement pay is taxable as federal income tax and is not considered earned income for Social Security tax purposes. But this is not a disability and therefore falls under a different category, tax-wise.

Military disability retirement pay, if used to mitigate personal injury from active duty, is non-taxable if it follows any of the below criteria:

1. Your qualified for disability payments before September 25, 1975
2. You enlisted or were on the military before September 24, 1975
3. Your military disability pay was intended to support a combat-related injury

If your military disability retirement pay does not fit these categories, you may have to pay taxes on your benefits.

Thus, in certain circumstances, veterans may have to report benefits to the IRS and pay taxes on them. If you have questions, talk to an accountant or attorney who specializes in working with veterans.

Types of Non-Taxable VA Disability Benefits

There are multiple forms of non-taxable VA disability benefits available to you if you qualify. Examples of such non-taxable benefits may include:

• Disability compensation
• Pension payments
• Grants for home modifications

If you retired from military service and later received a retroactive VA disability rating, your retirement pay may be non-taxable. The amount excluded is how much VA benefits you were entitled to receive.

Disability compensation refers to injuries or diseases incurred due to active military service, but it also extends to post-service disabilities as well. If you can prove your condition is related to your time in the military, you may qualify for disability compensation.

An inflation-adjusted federal Cost of Living Adjustment (COLA) increased military retirees’ and disabled veterans monthly checks by 8.7 percent in 2023.

Lump-Sum Severance Payments

If you were discharged from the military because of a medical disability, you may qualify for a one-time lump-sum severance payment. In most cases, this type of VA benefit is taxable income.

Even so, there are exceptions that make lump-sum severance payments non-taxable if the following are true:

• Your condition resulted from a combat-related injury, or
• You received notification from the VA that your severance payment is considered a form of disability compensation

However, veterans who received a lump-sum disability severance payment after January 17, 1991 now have additional time to claim a credit or a refund for overpayment thanks to the Combat-Injured Veterans Tax Fairness Act of 2016.

If you qualify for a tax refund after filing your lump-sum severance payment as income, don’t wait until the last minute to file your claim. You’ll potentially risk getting rejected if you wait too long, in which you’ll have to appeal once again.

Dependency and Indemnity Compensation (DIC)

Dependency and Indemnity Compensation (DIC) is a tax-free monetary benefit payable to loved ones after a service member dies on active duty.

Those eligible to receive Dependency and Indemnity Compensation include:

• Spouses
• Children, or
• Parents of the deceased

They may also receive this benefit if a service member passes away from a service-connected disability.

Special Monthly Compensation (SMC)

This form of compensation may be awarded to surviving veterans, spouses, or parents if the veteran was afflicted by a special condition, such as:

• Requiring need of aid and attendance from another person, or
• Specific disabilities like losing an arm or leg

This is often a higher rate of compensation due to the special circumstances involved, and it is non-taxable.

This VA benefit is often referred to as “aid and attendance” to spouses and loved ones. The amount compensated is based on the need of aid and attendance by another person.

If you were granted combat-related special compensation, you may be eligible for a tax refund that year.

Are VA Benefits Non-Taxable After a Rating Increase?

If you had a recent increase in your disability rating, you may be eligible for a tax refund. This can only be applied to the year VA reassessed your disability level.

Disabled veterans may be eligible to claim a federal tax refund based on:

• Either an increase in the veteran’s disability rating from the VA (which may include a retroactive determination)
• Qualifying for combat-related special compensation after an award for Concurrent Retirement and Disability.

You’ll need to file the amended return, Form 1040-X, to correct a previously filed Form 1040, 1040-A or 1040-EZ. An amended return can be e-filed or filed by paper for most returns.

Is VA Disability Back Pay Taxable?

No, disability benefits from the Department of Veterans Affairs are not taxable, even if it is back pay. You do not have to include it as income on your tax return. Again, if you are a VA disability beneficiary, you are exempt from paying taxes on back pay.

Schedule a Consultation With a LegalASAP Veterans Attorney

If your VA disability cannot cover your losses or if you believe they miscalculated your claim, you have the right to refile. A VA disability attorney who can analyze your case work with you directly is invaluable to a successful claim.

Reach out to our network today to find a qualified expert. Your case is important, and you deserve the right help.