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Veteran Tax Benefits

Military tax season

When tax season arrives, it pays to find as many legal tax breaks as possible, and there are plenty of those for those who served. But not all veteran tax benefits are well known. Some are offered at the federal level, but many are also provided by the states.

If you have retired or separated from the military, you likely know about the types of post-military benefits offered to those who serve. Those benefits can include a pension for those who serve 20 years or more and VA disability pay for those who qualify.

Some lesser-known veteran benefits include income tax deductions and property tax waivers. There are both state-level and federal-level tax breaks offered to qualifying service members, veterans, and their families.

This article is not tax advice. This article doesn’t cover tax benefits for those who currently serve; that’s the subject of another post. The information in this article is current at publication time, but all tax laws are subject to change from year to year. Consult a tax professional to learn what is permitted in the current tax season.

Federal Income Tax Benefits For Veterans

While it’s true that military retirement pay is taxable at the federal level, there is no Social Security tax deducted from it.

  • If you enrolled in the Survivor Benefit Plan to provide income to your next-of-kin, those premiums are paid from your gross retirement pay, not net.
  • That means your net taxable income is lower in the eyes of the IRS.

Veteran education benefits are tax-free. That means your Post 9/11 GI Bill housing stipend is not considered income for federal tax purposes.

But tax-free VA education benefits are not limited to the GI Bill. Most or all VA education benefits are exempt from taxes. The same is true of VA disability payments.

  • If you have VA disability rating, you won’t be taxed on your disability pay.
  • Disability retirement pay is also non-taxable.
  • You won’t pay taxes on grants to help you make a home or vehicle accessible.
  • You won’t pay taxes on interest from VA life insurance
  • Taxes are not levied on federal benefits paid to survivors of a member of the armed forces who died after Sept. 10, 2001.
  • You won’t pay federal taxes for any VA work therapy program payments.

Combat-Related Tax Refund

Have you had a recent change in your VA disability rating? Were you authorized to draw Combat-Related Special Compensation? You may qualify for a federal tax refund applied to the federal income tax season when the VA determined your disability.

You must file an amended return, Form 1040-X, Amended U.S. Individual Income Tax Return to claim this refund. You will use this form to add corrections or update a previously filed Form 1040, 1040-A or 1040-EZ.

IRS.gov advises, “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.”

Earned Income Tax Credit

Depending on circumstances, some veterans may qualify for the federal Earned Income Tax Credit, which is described at IRS.gov as a “refundable federal income tax credit for low- to moderate-income workers and their families. Roughly two million Veterans and military households receive the EITC, the refundable component of the Child Tax Credit or both…”

Discuss the federal Earned Income Tax Credit with a tax professional if you aren’t sure how this may apply to you. In general, the IRS says the amount you qualify for may vary “if you have children, dependents, are disabled or meet other criteria.”

State Tax Benefits for Veterans

In the same way that military disability retirement pay is not taxable at the federal level, you’ll find similar provisions at the state level. Not all states offer the same tax incentives or exemptions; typically, you must consult a tax professional or your local tax assessor’s office where property taxes are concerned to learn what is available in your state.

  • Some states tax military retirement pay, and some do not.
  • Most states in the Union exempt military retirement pay or have no income tax whatsoever.
  • A small number may still tax military retirement pay in whole or in part.

You may also find tax breaks for combat pay, Department of Veterans Affairs Disability Dependency and Indemnity Compensation, and certain types of military spouse income.

  • The spouse income exemption typically applies to military spouses who reside in a state because of military orders.
  • Qualifying military spouses are not subject to income taxes for money earned in that state.
  • Not all states have these tax breaks, but many do.

Why is this tax benefit mentioned in an article for retired and separated military members? Because military retirement and separation dates don’t always coincide with the start or end of a tax season.

A veteran may have been in the state under orders up to their separation date, and such tax laws would apply for the vet’s remaining time in service, whether for a partial year or an entire year’s worth of duty. Check with your state tax authority or state-level Department of Veteran Affairs or its equivalent to learn what may apply to you.

Read more: Tax-Free Military Retirement Pay in These States

State Tax Changes May Benefit Military Members

It pays to check state tax laws each year as some state-level tax requirements that apply those in unif0rm may change.

For example, in 2023, three states made moves to stop taxing some or all military income such as retirement pay, Guard and Reserve pay, etc. In 2023, Indiana ended state taxes on military pay, after ending income taxes on military retirement pay in 2022.

Montana changed its tax code to allow up to half of military retirement pay as exempt from taxes. This lasts five years maximum and must be claimed after the retiree becomes a Montana resident and/or begins drawing military retirement pay.

Starting in the 2023 tax year, Maryland has increased its tax exemption for military income. Now, the first $12,500 of military retirement pay for those under age 55 is exempt from state taxes there. These are only a handful of states that have made changes in recent years, is your state next?

State Property Tax Benefits For Veterans

State property tax breaks are typically offered conditionally; the applicant must not have a Dishonorable discharge, state residence may be required, and you may qualify for additional tax exemptions if you have a VA disability rating. Surviving spouses may qualify in some cases, but in others, the tax benefit may apply only to the veteran.

In some cases, a state property tax exemption may apply for the entire amount of tax owed (typically in cases involving vets with VA-rated 100% service-connected disability) or a portion of the tax owed in a given year. There is no standardization from state to state, and some of these tax exemptions may vary from county to county.

Here are some examples of property tax exemptions and what they require:

  • Illinois Returning Veterans’ Homestead Exemption (RVHE)
    This state tax break offers a one-time tax reduction for primary residences ($5000 at the time of this writing, amounts subject to change) for those who served in armed conflicts.
  • Wisconsin Veterans and Surviving Spouses Property Tax Credit
    This Wisconsin property tax credit is for qualifying veterans and surviving spouses, a refundable property tax credit for primary residences, and “up to one acre of land.” This is for veterans who are 100% disabled, are state residents, and have an Honorable discharge.
  • California Veterans Property Tax Exemption
    One of the more unique property tax breaks for veterans, the California Veterans’ Exemption provides a tax exemption up to $4,000 for qualifying veterans, currently serving service members and eligible family members. To qualify for this tax break, you must own land worth no more than $5,000 (for single taxpayers) or $10,000 (for married taxpayers.)

Other Tax Benefits for Veterans

TurboTax Free for Military

Enlisted active duty and reserve military members can file their state and federal taxes for free with TurboTax, which is is typically offered for the applicant who does not need tax help and is filling out their own tax forms.

Free Tax Prep: AARP Foundation Tax-Aide

This free tax preparation service is offered to everyone regardless of age or occupation (including veterans), with a “special focus on taxpayers who are over 50 or have low to moderate income,” according to the official site. In-person and online tax help is available nationwide. Tax-Aide reps are IRS-certified yearly “to ensure they know about and understand the latest changes and additions to the tax code.”

States That Don’t Tax Military Retirement Pay

  • Alabama
  • Arizona
  • Arkansas
  • Connecticut
  • Florida
  • Hawaii
  • Idaho
  • Indiana
  • Iowa
  • Louisiana
  • Maine
  • Massachusetts
  • Michigan
  • Minnesota
  • Missouri
  • Nebraska
  • Nevada
  • New Hampshire
  • New Jersey
  • North Dakota
  • Oklahoma
  • Ohio
  • Pennsylvania
  • Rhode Island
  • South Carolina
  • South Dakota
  • Tennessee
  • Texas
  • Washington State
  • West Virginia
  • Wisconsin
  • Wyoming

Military Spouses Who File State Income Taxes

Military spouses filing their own income taxes at the state level may claim either the same state of legal residence as their partner or claim the state they’re living in. In some instances, these spouses may be permitted to claim the state of legal residence they had before marriage.

Servicemembers Civil Relief Act (SCRA) rules say you won’t be double taxed if your spouse works one state and has a “permanent legal residence” in another state.

What’s Next?

You may wish to learn about the most current free tax filing help for military members and veterans.

 

About the author

Editor-in-Chief

Editor-in-Chief Joe Wallace is a 13-year veteran of the United States Air Force and a former reporter/editor for Air Force Television News and the Pentagon Channel. His freelance work includes contract work for Motorola, VALoans.com, and Credit Karma. He is co-founder of Dim Art House in Springfield, Illinois, and spends his non-writing time as an abstract painter, independent publisher, and occasional filmmaker.