Veterans Pensions – What Is and Isn't Taxable at the Federal and State Levels
Posted in Uncategorized on February 27, 2018
When it comes to taxes, navigating regulations and terminology are difficult, but even more so for our nation’s veterans. That’s because there are many different types of veterans benefits and pensions, and each one is treated differently at tax time.
In most cases, you’ll need to know which benefits should be included as income (and taxed) and which benefits should not be included as income (and not taxed). To further complicate issues, while there are some federal tax benefits for veterans, there are also many state-specific tax benefits, because each state controls its Veterans’ Affairs office.
What You Need to Know at the Federal Level About Veterans Pensions
Changes happen each year, so it’s important to check the U.S. Department of Veterans Affairs (VA) and Internal Revenue Services (IRS) websites every year to make sure you’re not missing out on a tax benefit or neglecting to include taxable income on your return.
Include These Benefits in Your Income (They’re Taxable)
Military Retirement Pay: According to H&R Block’s Monica Welsh, “If you receive military retirement pay – based on age or length of service – this income is taxable and is included in your income as a pension.”
Severance Pay: Veterans who received a lump-sum disability severance payment upon discharge may need to include it as income. However, the Combat-Injured Veterans Tax Fairness Act of 2016, which went into effect in 2017 may mean that your severance pay is not taxable.
According to the IRS, “Under federal law, Veterans who suffer combat-related injuries and who are separated from the military are not to be taxed on the one-time lump sum disability severance payment they receive from the Department of Defense. More than $78 million is owed to an estimated 14,000 Veterans. This law instructs DoD to identify Veterans who were taxed in order for them to file an amended return to receive their refund.”
Veteran’s Affairs Health Care Services: This includes reimbursement for a wide variety of services like:
- Alcohol and drug dependency treatment
- Dental coverage
- Hospital stays
- Nursing home coverage
- Readjustment counseling
Unemployment Compensation: Welsh says that “the military provides Veteran unemployment compensation under certain programs for ex-military personnel. Unemployment compensation received under these specialized programs is treated the same as any other unemployment benefits and is taxable to you as a recipient.”
Don’t Include These Benefits in Your Income (They’re Not Taxable)
According to Welsh, in 2017 “any reductions in your retirement pay, including what’s paid via survivor annuity under the Survivor Benefit Plan (SBP), should not be included in your income.”
In addition to these reductions, there are seven federal tax benefits available to Veterans and their families that should not be included in your income because they are not taxable. These include:
- Disability Compensation
- Disability Pension
- Education and Training Benefits (like the Post-9/11 GI Bill)
- Housing Grants (like the Specially Adapted Housing (SAH) grant)
- Life insurance benefits from specific groups like the Servicemembers’ Group Life Insurance Traumatic Injury Protection, Service-Disabled Veterans’ Insurance and Veterans’ Mortgage Life Insurance.
- The Compensated Work Therapy (CWT) Program.
Dependents and survivors of veterans can receive tax benefits for:
- Death gratuity
- Survivor’s pension
- The Veteran Affairs’ Dependency and Indemnity Compensation payment
What You Need to Know at the State Level About Veterans Pensions
Again, changes happen each year, so it’s important to check the VA and IRS websites every year to make sure you’re not missing out on a tax benefit or neglecting to include taxable income on your return.
Some states, like California, have reduced or eliminated property tax for disabled Veterans. For example, according to Mike Jelinek of The Simple Dollar, with “California’s Disabled Veterans’ Exemption, as long as the property is the veteran’s primary place of residence; the full value of the residence does not exceed $150,000; and total household income does not exceed $40,000, a 100% disabled veteran is allowed to claim a full property tax exemption.”
Click here for a full list of property tax exemptions by state.
There are a couple of ways that you can figure out which Veterans benefits are taxable at the state level and what ones aren’t:
- Visit the U.S. Department of Veterans Affairs and click on your state or territory for your regional office. Give them a call if you can’t find the information that you’re looking for.
- Join the U.S. Department of Veteran’s Affairs and the Department of Defense’s eBenefits.va.gov which, according to Jelinek, allows Veterans to “search and apply for benefits, view their disability compensation claim status, access official military personnel documents, and register for an update direct deposit information for certain benefits, among others.”
Veterans Benefits Don’t Qualify for the Earned Income Tax Credit
If Veterans benefits are your only source of income, then you may not qualify for other tax credit programs. “Unfortunately, Veterans’ benefits do not qualify as earned income for the Earned Income Tax Credit (EITC). Therefore, if the only income you receive would be classified as Veterans benefits, you would not have any earned income to qualify you for the EITC,” Welsh says.
IRS Programs for Veterans and Their Families
As you can see, the intricacies of filing taxes for veterans, from what is and isn’t considered income to what regular tax benefits do and do not apply is difficult to keep track of. The programs mentioned here only scratch the surface of what’s available, and remember, most states have their own rules. That’s why in 2015 the IRS and U.S. Department of Veterans Affairs created a “Memorandum of Understanding.” Often referred to as MOU, the goal of this program is to “provide free tax preparation services to veterans and their families.”
This program, which is eligible to veterans and their families “whose incomes are low to moderate” connects partnering organizations and IRS-certified volunteers with Veterans. Visit the IRS’ website for more information.
The IRS has a variety of additional resources that are helpful for Veterans and their families, including their:
- Free Financial Coaching for Veterans program (call 1-844-90-GOALS or click here for more information).
- Military OneSource Resources for Transitioning Service Members and Families which provides MilTax online software for free for qualified Veterans
- Outreach Corner (which is not veteran-specific but which includes updates on the newest tax changes)
- Programs to help homeless Veterans including offering tax and financial advice at neighborhood Stand Down events.
You can find more information on tax breaks and programs for military personnel and veterans here:
- "Full List of Property Tax Exemptions By State"
- "On Veterans Day, A Look At Special Tax Rules, Including Tax Breaks, For The Military"
- "State Veterans Benefits"
- "Taxes on Disability and Retirement Pensions"
- "The Ultimate Tax Guide for Veterans"
- "Veterans Day: Are Veterans Benefits Taxable?"
- "What States Are Tax-Free for Disabled Veterans?"