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Through the Department of Veterans Affairs (VA), veterans can receive a wide range of benefits, such as those related to disability, pensions and severance pay. If you are a veteran, you may qualify for a number of benefits that may make a significant impact when it comes time to file your individual income tax return.
The VA offers financial compensation in certain circumstances. For example, if you were at least 10 percent disabled as a result of your military service, you may qualify for disability compensation; and if you are a wartime veteran with limited income who was either permanently and totally disabled or over 65 years old, you may qualify for monthly pensions. Both benefits are exempt from both federal and state income tax.
Veterans interested in receiving compensation or pension payments should keep in mind that the application process through the VA may take a minimum of six months. If you have retired from active duty and submitted an application for disability compensation, you will generally begin receiving your military retirement income prior to receiving entitlement from the VA. Once the VA has granted your disability, an entitlement letter will be provided that outlines the percentage of disability and monthly compensation amount granted. Until receipt of the entitlement letter, you must include any retirement pay received on your federal and state income tax return. Once that letter is in hand, you may amend any previously filed tax returns to reduce your taxable income by the monthly VA compensation amount granted (and noted in the letter). A copy of the VA entitlement letter and Form DD-214 must be attached when filing amended tax returns or making an adjustment on a current tax return, both federal and state.
If you were injured on active duty, you can choose to receive a lump-sum disability severance payment at the time of your discharge from the Armed Forces. If your disability is combat-related, you may be eligible for a monthly disability pension from the VA. The lump-sum disability severance payment you received when discharged is fully taxable in the year received, but if you are granted a VA entitlement at a later date, you may be eligible to amend your previously filed return and subtract the lump-sum disability severance payment. Under the current guidelines, the lump-sum severance payment is viewed by the VA as an overpayment of qualified disability benefits. The VA will not issue any compensation payments until the monthly entitlement reduces the previously awarded lump-sum amount to $0. A photocopy of the individual's VA entitlement letter and Form DD-214 will need to accompany the amended return.
Veterans who have misplaced or lost a DD-214 can contact the National Personnel Records Center (NPRC). The NPRC has provided the following website for veterans or their next of kin to gain access to their DD-214 online: http://vetrecs.archives.gov/
Military taxpayers should consult with a knowledgeable tax preparer, such as those at Jackson Hewitt Tax Service, to understand all of the tax implications associated with VA disability benefits. For the nearest Jackson Hewitt location, call 1-800-234-1040 or locate a nearby office at www.jacksonhewitt.com.
Resources: VA Pamphlet 21-00-1 (Dec 2005)
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