It’s my annual “Taxes from A to Z” series! Next up:
V is for Veterans’ Benefits
Under the Tax Code, income is reportable and taxable unless otherwise excluded. Fortunately, when it comes to veterans’ benefits, those paid under any law, regulation, or administrative practice administered by the Department of Veterans Affairs (VA) are completely excludable.
Excludable benefits for veterans includes educational benefits, including education, training, and subsistence allowances. Likewise, benefits under a dependent-care assistance program are not taxable.
Excludable benefits for veterans also include compensation and accommodation for disabilities. Specifically, disability compensation and pension payments for disabilities paid either to veterans or their families as well as grants for homes designed for wheelchair living and for motor vehicles for veterans who lost their sight or the use of their limbs are not taxable. Payments made under the compensated work therapy program are similarly excludable.
Death benefits for veterans and their families are also excludable. Veterans’ insurance proceeds and dividends paid either to veterans or their beneficiaries, including the proceeds of a veteran’s endowment policy paid before death are not taxable, as are death gratuities paid to a survivor of a member of the Armed Forces who died after September 10, 2001. Any interest on those insurance dividends you leave on deposit with the VA are also excludable.
Finally, any bonus payment by a state or political subdivision because of a veteran’s service in a combat zone is tax free.
And remember, it’s not just benefits paid to veterans that are excludable. As noted above, those veterans’ benefits paid to family members are treated the same as those paid to veterans and are tax free.
For more information about taxes and the military, check out IRS Pub 3, Armed Forces’ Tax Guide (downloads as a pdf).