Tax Breaks for Disabled Veterans

IRS Form 525

Military retirement pay based on age or length of service is considered taxable income for Federal income taxes, and most state income taxes. However, military disability retirement pay and veterans' benefits, including service-connected disability pension payments, are almost always fully excluded from taxable income.

Taxability of Military Retirement Pay

Military retirement pay based on age or length of service is taxable and must be included as income for Federal income taxes. The amount of your pay that is deducted for the Survivors Benefit Plan (SBP) is excluded from taxable income. For Social Security tax purposes, military retirement pay is not considered earned income and no Social Security is withheld.

Military Disability Retirement Pay shouldn't be included in taxable income if your disability or injury was caused by combat or if you get military disability instead of VA disability for your injuries.

Veterans Benefits

Veterans benefits are also excluded from Federal taxable income. The following amounts paid to veterans or their families are not taxable:

  • Education, training, and subsistence allowances
  • Disability compensation and pension payments for disabilities paid either to veterans or their families
  • Grants for homes designed for wheelchair living
  • Grants for motor vehicles for veterans who lose their sight or use of their limbs
  • Veterans' insurance proceeds and dividends paid either to veterans or their beneficiaries, including the proceeds of a veteran's endowment policy paid before death
  • Interest on insurance dividends left on deposit with the VA
  • Benefits under a dependent-care assistance program
  • The death gratuity paid to a survivor of a member of the Armed Forces who died after Sep. 10, 2001
  • Payments made under the compensated work therapy program
  • Any bonus payment by a state or political subdivision because of service in a combat zone

For more information, visit Publication 525, "Taxable and Nontaxable Income," Special Rules for Certain Employees/Military regarding Federal taxes on military retirement pay or veterans' benefits maintained by the Internal Revenue Service.

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Military Taxes