Is Your VA Disability Income Taxable?
Learn the tax principles governing VA disability pay and how these non-taxable benefits can alter your annual reported income and tax forms.
This article clarifies the tax treatment of disability benefits from the Department of Veterans Affairs (VA). We will cover the tax-free status of these payments and explain how they interact with military retirement pay.
Tax-Free Status of VA Benefits
The Internal Revenue Service (IRS) does not consider VA disability benefits to be part of your gross income for tax purposes. Therefore, any disability compensation you receive from the VA is not subject to federal income tax. Because federal law exempts these benefits, they are also not taxed at the state level.
The range of non-taxable benefits is broad. It includes disability compensation and pension payments made to veterans or their surviving family members. Specific grants, such as those for constructing an accessible home or purchasing a specially equipped motor vehicle, are also tax-free.
The tax exemption also extends to education, training, and subsistence allowances, including benefits from programs like the Post-9/11 GI Bill. Veterans’ life insurance proceeds and any dividends paid from those policies are excluded from taxable income. Benefits paid to survivors, such as Dependency and Indemnity Compensation (DIC), are also tax-free.
Interaction with Military Retirement Pay
The relationship between VA disability benefits and military retirement pay can be complex. Military retirement pay is considered taxable income, but veterans have options to reduce their tax liability by integrating their VA benefits.
One option is the VA waiver. A veteran can choose to waive a portion of their taxable military retirement pay to receive an equivalent amount of non-taxable VA disability compensation. This exchange reduces the total taxable income the veteran reports. The Defense Finance and Accounting Service (DFAS) adjusts the reported retirement income before issuing tax forms.
Some veterans may qualify for Concurrent Retirement and Disability Pay (CRDP). This program allows eligible military retirees with a VA disability rating of 50 percent or higher to receive both their full military retirement pay and their VA disability compensation. Under CRDP, the retirement pay remains taxable, while the VA disability pay is non-taxable, with no offset.
Another provision is Combat-Related Special Compensation (CRSC), a non-taxable payment for veterans with combat-related disabilities. CRSC replaces the amount of military retirement pay that was waived to receive VA benefits. For those who qualify, both the CRSC payment and the VA disability compensation are non-taxable.
How to Report on Your Tax Return
You are not required to report VA disability compensation, grants, or other exempt payments on your federal or state income tax returns. The IRS does not require special forms or attachments to claim this exemption.
For veterans who use a VA waiver, the reporting is handled for them. The Defense Finance and Accounting Service (DFAS) will issue a Form 1099-R that already reflects the reduction in taxable retirement pay. The amount shown in the “taxable amount” box on Form 1099-R is the figure you will report on your tax return.
You do not need to make any manual calculations or adjustments on your tax forms to account for the waived amount. The income reported on the 1099-R is the final figure for tax purposes.