The latest report from the Veterans Benefits Administration says that over 5.2 million Veterans and their families receive disability benefits today. This compensation is an important and hard-earned source of income. But are VA benefits considered taxable income?
Tax season can feel overwhelming. As a Veteran may already have to put up with seemingly never-ending bureaucracy on the way to your VA benefits. That is why it is so important to make smart financial decisions when it comes to taxes.
We’ve created this simple guide that will help you understand whether your VA disability compensations can be considered a taxable income and how can it correlate with some other benefits you may be entitled to.
VA Disability Benefits and the IRS
The IRS Publication 907 clearly says “Don’t include disability benefits you receive from the Department of Veterans Affairs (VA) in your gross income.”
In other words, according to the Internal Revenue Service (IRS), VA disability benefits are not taxable. Well, if the answer were that simple, we wouldn’t have dedicated an entire article to this topic!
There are specific cases when you may have to report some of your VA compensations to the IRS, and therefore, pay taxes on them. Let’s look at the differences between the various types of compensation you can receive as a Veteran.
Taxable VA Disability Benefits
Technically, there are 4 scenarios when your VA compensations may be partially or entirely subject to taxation:
Military Retirement Pay
Military retirement pay includes pensions received by Veterans who served in the armed forces and retired after completing a certain period in service.
Technically, military retirement pay is taxable on the federal level. However, the taxation depends on many factors like the state you live in, your overall income, and deductions and credits you may be entitled to.
In fact, only seven states – California, Georgia, Montana, Rhode Island, Utah, Vermont, and Virginia – tax military retirement pay fully and offer little to no tax benefits for retired Veterans.
All other states have at least some sort of exemptions or special considerations for military retirement pay. Make sure to consult a qualified Certified Public Accountant (CPA) with deep knowledge of your local taxation laws.
Unemployment Compensation for Ex-Service Members (UCX)
IRS views UCX benefits provided to former members of the military just like any regular unemployment benefits. It means that they are taxable at the federal level.
With the UCX payments Veterans receive a Form 1099-G, detailing the total amount of unemployment compensation received during the tax year. This amount should be reported on the federal income tax return.
Concurrent Retirement and Disability Payments (CRDP)
Along with your VA disability benefits, you may receive CRDP, which replaces a portion of your retired pay with disability compensation. And while the VA disability portion of your benefits is not taxable, the CRDP part is subject to taxation.
Supplemental Security Income (SSI)
SSI is considered a “need-based program,”which means that IRS does not see it as taxable income. However, if you receive both SSI and VA disability benefits, the SSI part may be affected or become subject to federal tax depending on the final amount.
As you see, it’s not always a clear cut case as to what can affect the amount of tax you must pay. That is why we will never tire of repeating how crucial it is to have qualified professionals on your side when it comes to claiming and managing your disability benefits.
The Amended Tax Return for Veterans
In some cases, Veterans may have to file for a federal tax refund. This happens when the VA increases your disability rate, and therefore, your compensation, and if you receive retroactive disability benefits after a lengthy processing period.
In these cases, the IRS will require you to file an amended tax return.
You will need to file the IRS Form 1040-X, Amended U.S. Individual Income Tax Return Form. IRS will use this information to update the previously submitted information about your income.
While this compensation is tax-free, failing to submit the necessary documents on time may lead to unnecessary complications and legal consequences.
However, you won’t have to provide the IRS Form 1040-X if the Defense Finance and Accounting Service (DFAS) sends you Form 1099-R. This form will contain all the corrected information about your taxable income, and no further adjustments will be required.
The tax code is notorious for being complex and hard to navigate. Even with the seemingly straightforward fact that VA benefits are not taxable, there may be exceptions that you and a qualified CPA may attend to.
If you’re ready to submit a VA disability claim, initiate an appeal, or just have questions, please book your 30-minute free call with the Veterans Specialist today. This conversation will help our team address your specific concerns and offer personalized service.
You don`t have to walk this path alone. VCU is your reliable ally in securing the benefits you rightfully deserve.