Are VA Aid and Attendance Benefits Taxable?
Understand the tax implications of receiving VA Aid and Attendance. While the benefit is tax-free, it affects how you account for related medical costs.
VA Aid and Attendance benefits are not considered taxable income by the Internal Revenue Service (IRS). This financial support is a supplementary pension from the Department of Veterans Affairs (VA) for qualifying veterans and their surviving spouses who require assistance with daily activities. The purpose is to help defray the costs of long-term care, whether at home, in an assisted living facility, or in a nursing home.
Federal and State Tax Treatment of VA Benefits
According to the IRS, all benefits administered by the Department of Veterans Affairs are tax-exempt, as outlined in IRS Publication 907. This includes disability compensation, education benefits, and pension payments like Aid and Attendance. This federal treatment extends to the state level, as most states align their tax laws with federal guidelines. As a result, VA Aid and Attendance payments are not subject to state or local income taxes.
Reporting VA Benefits on Your Tax Return
Since VA Aid and Attendance benefits are not taxable, they are not reported as income on your federal tax return, Form 1040. The IRS does not require you to file any special forms to claim this tax exemption; it is applied automatically. You should keep the official award letter from the VA that details the benefit amount and its purpose. This documentation serves as your proof of the tax-free nature of the funds and is useful for your own records when managing expenses.
Interaction with the Medical Expense Deduction
The receipt of tax-free Aid and Attendance benefits impacts your ability to claim the medical expense deduction on your tax return. A tax principle is that you cannot deduct expenses that were paid for with tax-free money. This rule prevents what the IRS considers a “double benefit.” For example, imagine a veteran incurs $15,000 in annual home health aide expenses and receives $10,000 in VA benefits to help cover these costs. They can only consider the remaining $5,000 as a potential medical expense for deduction purposes.
To claim the medical expense deduction, your total qualifying expenses must exceed 7.5% of your Adjusted Gross Income (AGI). Using the previous example, if the veteran’s AGI was $50,000, the threshold would be $3,750. Since their $5,000 in expenses exceeds this amount, they could deduct the difference of $1,250. Accurately separating expenses paid with VA funds from those paid out-of-pocket is necessary to ensure compliance.