Are VA Disability Benefits Taxable? Which benefits are taxable?

Are VA Disability Benefits Taxable? Military retirement pay, based on age or length of service, is typically considered taxable income by the Internal Revenue Service.

Veterans’ benefits and military disability retirement pay are exceptions that may be excluded from taxable income.

In the case of military retirement pay, the amount paid to participate in the Survivors Benefit Plan (SBP) is excluded from taxable income.

While military retirement pay is taxable, it is not considered earned income for Social Security tax purposes, and therefore no Social Security payroll taxes are withheld.

Military disability retirement pay may be exempt from taxation under certain conditions.

As part of these conditions, one must have received disability payments before September 25, 1975, be a member of the military on September 24, 1975, receive disability payments for a combat-related injury, or be eligible for disability compensation from the Department of Veterans Affairs (VA).

As a general rule, veterans’ benefits, such as education allowances, disability compensation, and pensions, are not subject to federal taxation.

Furthermore, certain grants, insurance proceeds, and dividends paid to veterans or their beneficiaries are exempt from taxation.

Also excluded are death gratuities, payments under-compensated work therapy programs, and bonuses awarded by states or political subdivisions for service in combat zones.

There are special considerations when the VA awards a retroactive service-connected disability rating.

During the retroactive period, retirement pay may be excluded if a retiree receives a retroactive disability rating.

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What benefits are taxable?

No matter your age or length of service, your military retirement pension is fully taxable. If you receive a pension under these conditions, you must report the amount you receive as taxable income.

Nevertheless, you should not include that specific amount in your taxable income if a portion of your retirement pay is reduced so that an annuity can be allocated to your spouse or other survivor. In order to ensure proper handling of these financial matters, it is advisable to consult with a tax professional.