If you are a disabled veteran, IRS.gov says you may qualify for federal tax breaks depending on circumstances.
This may be possible when you are awarded an increased VA disability rating that may include back pay, or when a combat-disabled veteran is awarded “Combat-Related Special Compensation, after an award for Concurrent Retirement and Disability,” according to the IRS.
Related: Veteran Tax Benefits
Are Military Disability Benefits Taxable?
While the disability pensions some collect from private industries may be taxable, military disability retirement pay is not. IRS.gov states, “Don’t include disability benefits you receive from the Department of Veterans Affairs (VA) in your gross income.”
You should also not include non-taxable veteran benefits such as:
- Education, training, and subsistence allowances;
- Disability and pension payments for disabilities paid to veterans or their families;
- Grants for homes adapted for wheelchair living;
- Vehicle grants for veterans who lost their sight or the use of their limbs;
- Veterans’ insurance proceeds and dividends;
- Interest on insurance dividends on deposit with the VA;
- Benefits under a dependent-care assistance program;
- Certain VA death gratuities paid after September 10, 2001;
- Payments from VA’s compensated work therapy program.
>> Frustrated with your VA disability rating? Register for a free consultation for help with increasing your rating to get the compensation you deserve. Please go here.
Combat-Injured Veterans Tax Fairness Act of 2016
Those discharged from military service because of a medical disability may qualify for a one-time severance payment due to that discharge. Some of those payments may have been incorrectly taxed; veterans may now file claims to regain that tax money.
Veterans who took a lump sum disability severance payment after January 17, 1991, may benefit from the Combat-Injured Veterans Tax Fairness Act of 2016, which offers more time to claim a tax refund or credit in such cases.
The Combat-Injured Veterans Tax Fairness Act of 2016 states veterans with combat-related injuries and separated from the military “are not to be taxed on the one-time lump sum disability severance payment they receive from the Department of Defense.”
The Act requires the Department of Defense to identify those who may have been wrongly taxed under the act and notify the veterans to file an amended return to collect a tax refund.
Related: How do I Apply for Armed Forces Tax Benefits?
Claiming A Federal Income Tax Break as a Disabled Veteran
To claim a refund in a year in which you have already filed taxes, you must file an amended return using IRS Form 1040-X, Amended U.S. Individual Income Tax Return. You can submit this form to the IRS electronically, by mail, or in person.
IRS.gov states, “Disabled veterans should include all documents from the Department of Veterans Affairs and any information received from Defense Finance and Accounting Services explaining proper tax treatment for the current year.”
The IRS encourages military members and families to use a trained professional to submit tax documents, including amended returns.
Read more: Free Tax Support for Military Members
Help Filing Military Taxes
Military OneSource is an official DoD website offering a variety of help for military members and their families. That help includes military tax assistance you can sign up for at the official site.
The IRS Free File Program is another option; this is a public-private partnership between the federal government and private tax filing companies that helps qualifying military members to file their taxes for free.
- Free “Guided” Tax Preparation: This is an online tax prep and electronic filing option via an IRS partner website. If you have an annual gross income below $73,000 (at press time) you may qualify to file a free federal tax return using this service.
- Free Fillable Forms: The digital equivalent of submitting IRS Form 1040. Your annual income is subject to a cap ($73,000 for tax year 2022) so double-check the current limits before you file.
>> Frustrated with your VA disability rating? Register for a free consultation for help with increasing your rating to get the compensation you deserve. Please go here.