Paycheck Chronicles

Are GI Bill Payments Taxable?

IRS Form

You may wonder if you have to report your GI Bill benefits as income on your taxes, well the good news is that the answer is NO.

GI Bill benefits are NOT taxable and should NOT be reported on your tax return as income.  You will not receive a W-2 from the VA.

What The IRS Says About GI Bill And Taxes

According to IRS Publication 970:

"Payments you receive for education, training, or subsistence under any law administered by the Department of Veterans Affairs (VA) are tax free. Do not include these payments as income on your federal tax return.

If you qualify for the American Opportunity Credit or Lifetime Learning Credit and are using the GI Bill you may have to reduce the amount of tax deductions you are due from those programs by the amount of GI Bill benefits you receive.

This applies only to the part of your GI Bill that is required to be used for education expenses.

So, if you are getting $1,534 monthly housing allowance direct deposit to your checking account, and $3,840 in tuition paid directly to your college neither of these benefits is taxable, and you do not report them on your tax return.

But, if you want to claim an American Opportunity Tax Credit on your return you must deduct the GI Bill money from your total tax deduction.

Therefore, if you paid $5,000 in qualified education expenses, and got $3,840 from the GI Bill you can only claim $1,160 for the tax credit ($5,000 - $3,840.) 

You do not subtract any amount of the BAH because it was paid to you and not designated to be used only for education.

For more information check with the IRS. This information was taken from IRS Publication 970: http://www.irs.gov/pub/irs-pdf/p970.pdf

Good And Bad

The good news is that you don't have to pay income taxes on GI Bill benefits because they are considered a benefit rather than an income.

This is similar to how you had to pay taxes on any military pay like base pay, hazardous duty pay, etc. but didn't pay taxes on your military allowances like Basic Allowance for Housing, Basic Allowance for Subsistence, etc.

The bad side to all of this is that since your GI Bill benefits aren't considered as income, you are fairly limited on claiming them as such when you apply for a credit card, loan, or mortgage.

You may be surprised that you need other, steady sources of income to apply for credit.

Of course, you can always apply for a VA guaranteed home loan from a lender who understands the unique situations veterans face.

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Whether you're trying to balance your budget, build up your credit, select a good life insurance program, or are gearing up for a home purchase, Military.com has you covered. Sign up for a free membership and get the latest military benefit updates and tips delivered straight to your inbox.

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