Freedom isn’t free. Our nation’s security is provided by the active-duty members of our armed forces, who have chosen to serve and put their personal safety on the line as necessary to protect our citizens and ideals. When their military careers come to an end, the U.S. Department of Veterans Affairs (VA) is charged with meeting the needs of those who served. This includes veterans’ benefits like the GI Bill, military retirement pay, and VA disability compensation for qualifying veterans.
While many of these programs are common knowledge, other benefits of being a veteran may not be as well-known. For example, VA disability payments for veterans with service-connected injuries and illnesses are not considered taxable income and thus not subject to the Internal Revenue Service (IRS) income tax requirements. This includes the 2.8% Cost-of-Living Adjustment (COLA) that went into effect on December 1, 2025. For disabled veterans, this means keeping all of their disability benefits. In some instances, they won’t even need to file a federal tax return.
Another federal income tax season has begun. Whether you’re a family member, a surviving spouse, or served in the military yourself, it’s important to make sure veterans are aware of available VA programs and the tax benefits that make some of them a little bit better. If anyone has earned the right to tax breaks, it’s those who risked their lives to defend America.
For Those Who Served, It’s Deserved
For a country as large as the United States, it might be surprising to learn that fewer than 1% of the population is on active duty in one of the branches of the U.S. military. It’s estimated that around 6% of Americans are veterans right now. That’s a drop from 18% in 1980, which is likely due to the lack of a draft and the avoidance of large-scale wars and military actions.
As a thank-you for their service, state and federal governments offer benefits and programs. These include property tax exemptions, education benefits, and housing grants. A good number of these are exempt from both federal and state taxes. Here are some exemptions veterans should keep in mind while doing tax preparation:
Sources of Income
Veterans are not required to pay state or federal taxes on payments received for service-connected disabilities, such as VA disability compensation. This is regardless of their VA disability rating. Tax-free status also applies to dependency and indemnity compensation for surviving spouses and special monthly compensation for those suffering from severe disabilities.
If payments from VA disability benefits are your sole source of income, you may not be required to file a federal tax return. Even if you do, you’ll be exempt from paying taxes on it. If you’re uncertain if your veteran’s disability qualifies, you can seek assistance from the VA, an accountant, or a tax attorney near you.
Be aware that military retirement pay is NOT tax-exempt. It’s possible that your tax return can contain both taxable retirement pay and tax-free disability compensation income. The tax on retirement pension payments can be offset by Combat-Related Special Compensation (CRSC) or concurrent retirement and disability pay (CRDP). Because it might not be determined until after you’ve paid your taxes, CRSC can result in filing an amended return to receive a tax refund.
Home Repairs, Motor Vehicles, and Clothing
Any grants received that allow a disabled veteran to make home alterations or to adapt a motor vehicle to address their disabilities are tax-exempt. So are allowances provided to replace clothing either damaged by medications or prosthetics.
Back To School
Although the original version expired in 1956, the term “GI Bill” is generally used to describe any of the ensuing programs that aid veterans with paying for higher education at state colleges. In its various forms, the GI Bill has provided millions of veterans with opportunities for college and other training programs. Any funds received to pay tuition and other school-related costs are tax-free.
An interesting aside: While available for state college expenses, GI Bill funds can also be used for certain training programs, as well as for colleges outside the United States. The VA’s GI Bill Comparison Tool allows veterans to see what’s available and if they qualify. It’s recommended that your disability rating be settled before going abroad on the GI Bill.
Other Effects
While your disability compensation isn’t taxable, it still counts as taxpayer income. The IRS can’t touch it, which can make your loan application more attractive to mortgage lenders and other financial institutions. Due to the tax-free status, qualifying income through VA benefits is often given a higher value than taxable amounts. This can make it easier for veterans to secure larger loan amounts.
As income, the tax-free benefits are eligible for inclusion for alimony and child support payments. They can be garnished for nonpayment of these responsibilities. They are also added to calculations for determining levels for other assistance programs, such as Medicaid for your healthcare concerns.
You can receive both Social Security Disability Insurance (SSDI) and VA Disability payments, but you’ll need to apply for them separately. There may be required taxes on your SSDI if your combined payments are above a certain threshold
A Vow To Defend
There’s no way to adequately calculate how much the sacrifice made by those in our armed forces is truly worth. The programs and protections offered by the VA are a small way to thank the brave few who have served.
Those receiving compensation for injuries suffered in the defense of our country are not required to pay taxes on any disability benefits. It’s one of the boons earned for their sacrifice.
Related Resources
- Personal Income Tax: Overview (FindLaw’s Federal Tax Laws)
- Social Security Disability Law (FindLaw’s Learn About the Law)
- Top 5 Military Law Issues (FindLaw’s Law and Daily Life)
