If you are a U.S. veteran, the debt of gratitude your country owes you can never be repaid. The IRS understands the difficulty you may have readjusting to civilian life, especially if you have become disabled. Not only does the federal government offer veterans tax benefits, but most states do as well.  

Free tax preparation for veterans

In 2015, the VA and the IRS partnered with other organizations to provide veterans and their families free tax preparation services. They called the agreement a Memorandum of Understanding. 

One of the partners is the Volunteer Income Tax Assistance program. To qualify, you must make less than $55,000 a year, and other possible additional restrictions for small business owners.  

However, VITA is only one of several free tax preparation options available. As a veteran, you can access 14 tax preparation software products for free through IRS Free File if you earned less than $66,000. Not only can you prepare your taxes, but you can also e-file them as well.  

You don’t lose out if you earned more than $66,000, though. You can still access electronic versions of the IRS’ paper forms through Free File Fillable Forms. Another online resource is the Department of Defense’s Military OneSource MilTax e-filing software. 

Federal-level veterans’ tax benefits 

Veterans may receive a number of benefits that are not taxable. Some of these are tax breaks for disabled veterans, while others apply to all former service members. You’ll find that eligibility requirements often apply to these benefits. 

Your tax breaks often come in the form of benefits that you do not report on your income tax return. Because they do not count toward your gross income, your tax liability becomes smaller as a result. The following are examples of nontaxable veterans’ benefits. 

1. Education and training 

Both veterans and active military members, including National Guard members and reservists, can apply for the Post-9/11 GI Bill. This benefit provides financial aid to help finance either on-the-job training or postsecondary education.  

2. Life insurance 

Life insurance benefits are often subject to taxes. Most policies with the Servicemembers’ Group Life Insurance through the VA are exceptions to the rule. Coverages are available for disabled veterans as well as veterans’ families. 

3. Compensated work therapy program 

CWT provides vocational rehabilitation services, assisting veterans who are unable to work and support themselves. Beneficiaries of CWT are not necessarily physically disabled. Rather, they may experience other issues such as homelessness, mental illness, and substance abuse. The program tailors services to meet each individual’s circumstances and unique needs. 

4. Housing grants 

Specially Adapted Housing grants assist in modifying a home to meet the adaptive needs of a disabled veteran. In some cases, the grant may go toward constructing a new, accessible home for the veteran and his/her family.  

5. Disability compensation and disability pension 

These are both benefits paid to veterans with disabilities. They are similar in that neither counts as taxable income. However, they are not the same thing. If you experience a service-connected disability, you receive disability compensation. In other words, you receive compensation from the military if you become disabled as a result of your service. This includes having a pre-service disability that your service exacerbated. 

Disability pensions go to veterans with disabilities not caused by combat and/or those over age 65. For example, a veteran who develops cataracts or Parkinson’s disease may be eligible to receive a disability pension. However, because the disability did not result from conflict, disability compensation would not be an option. Veterans who are housebound due to a severe disability may qualify for an additional benefit for aid and attendance. 

As you’re preparing your taxes, don’t forget about tax breaks not exclusive to the military. For example, low- to moderate-income workers, including veterans, may be eligible for the Earned Income Tax Credit. Other tax credits may be available as well. If you’ve recently been searching for civilian employment following discharge, you can also deduct expenses related to your job search. 

State-level tax benefits for veterans

In addition to federal tax benefits, many veterans enjoy tax breaks and exemptions at the state level as well. You must find out the specific laws in your state to find out what tax benefits may apply. 

Not all states charge their own income taxes, but in those that do, disabled veterans are often exempt. Some states exempt disabled veterans from paying sales tax. Others exempt military retirement or service pay up to a certain amount.  

Another tax benefit for disabled veterans in many states is the reduction of property taxes. Only three states (Missouri, Rhode Island, and Delaware) offer no such reduction. The benefits in other states vary according to income, property value, and degree of disability.  

Don’t forget about your liability

Unlike civilian employers, the Armed Forces do not withhold taxes from your pay. Confusingly, however, the Defense Finance and Accounting Service do withhold tax from your monthly retirement payments. You should fill out a Form W-4P before leaving the military to let the DFAS know how much to withhold. You should also keep track of your liability as long as you’re still on active duty. 

Justine Rabideau

Justine Rabideau

Justine Rabideau is a savvy digital marketer with an extensive writing background. She has a passion for finance, technology, and keeping up with the latest trends in the industry.
Justine Rabideau