Are VA Survivor Benefits Considered Taxable Income?
Understand the tax rules for payments a veteran's survivor receives. Learn why most VA benefits are tax-free while other related income may be taxable.
Understanding the tax implications of survivor benefits depends on which government agency provides them. Benefits paid directly from the U.S. Department of Veterans Affairs (VA) are non-taxable income for federal tax purposes. This means survivors do not owe federal income tax on these payments. State tax laws also generally align with this federal treatment, exempting these funds from state income tax.
Tax-Free VA Survivor Benefits
The primary monetary benefits from the VA for survivors are Dependency and Indemnity Compensation (DIC) and the Survivors Pension. DIC is a monthly, tax-free payment to eligible surviving spouses, children, or parents of a service member who died in the line of duty or from a service-related injury or illness. These payments provide their full value to the recipient without being reduced by taxes.
The VA Survivors Pension is another monthly payment that is not subject to income tax. This benefit is available to low-income surviving spouses and unmarried children of deceased veterans with wartime service. Eligibility is based on the survivor’s annual family income and net worth, which must fall below limits set by Congress.
Beyond direct monetary compensation, the VA provides other non-taxable benefits. These include educational assistance, such as the Fry Scholarship and the Survivors’ and Dependents’ Educational Assistance (DEA) program. VA burial allowances, which provide a partial reimbursement for funeral costs, and assistance from the VA Home Loan Guaranty benefit are also exempt from taxation.
Tax Status of Other Survivor Payments
It is important to distinguish between benefits from the VA and payments from other government entities, which have different tax rules. Proceeds from Servicemembers’ Group Life Insurance (SGLI) or Veterans’ Group Life Insurance (VGLI) are a primary example. As life insurance payments, the lump-sum death benefit paid to a beneficiary is not considered taxable income.
In contrast, annuities paid under the Survivor Benefit Plan (SBP) are administered by the Department of Defense, not the VA, and are considered taxable income. SBP is a program that a military retiree pays into to provide a continuous monthly income to their eligible survivors. This different tax treatment arises because SBP is classified as a retirement annuity, while VA benefits are compensation for a service-related death.
Reporting Benefits on Your Tax Return
For non-taxable payments, such as VA DIC, Survivors Pension, and SGLI proceeds, you will not receive a Form 1099 from the government. You do not need to report this income on your federal Form 1040, as the funds are excluded from your gross income calculation.
Survivors receiving SBP annuity payments will be sent a Form 1099-R from the Defense Finance and Accounting Service (DFAS). The income reported on this form must be included on your tax return. Failing to report this taxable income can lead to penalties from the IRS.
Regarding state taxes, the rules almost always mirror the federal guidelines. States do not tax VA survivor benefits or life insurance proceeds, but confirming with your specific state’s department of revenue is a prudent step. SBP income is typically taxable at the state level, just as it is federally, though some states may offer partial exemptions for retirement income.