Posted by Thomas G Kinsella, ATP

Overview Of Tax Guide For Military and Veterans

Overview Of Tax Guide For Military and Veterans

Wouldn't life without taxes be beautiful? You can't avoid them entirely, but as a veteran of the United States Army, you have access to tax benefits that, for the most part, are not available to other Americans. In return for their service to the country, the federal government and some states have implemented tax incentives to ease their financial burden or facilitate their return to civilian life.

These military-related tax benefits are divided into three groups:

  • Federal Tax Exclusions: The US government allows you to exclude certain income types from calculating adjusted gross income on your tax return. In other words, part of your income is tax-exempt. By totally excluding certain income, you can effectively reduce the total amount of income tax you owe or increase your refund. It may also affect the amount of tax credits you receive.

  • State Tax Exclusions: State governments also designate certain income types as tax-exempt for military and veterans to be excluded from gross income calculations. Since states differ in how they perceive current military income and veteran benefits, check the state's tax laws where you are a permanent resident to understand what income may be excluded from income tax.

  • Other non-taxable state benefits: In addition to tax benefits, many states offer additional tax-free benefits. Some states do not tax property, or only partial levy amounts for veterans' primary residences or returning military personnel. Some other states may waive all or part of annual vehicle taxes or fees for military or veteran residents. Again, you will need to consult the specific tax laws of your state.


Eligibility for Tax Benefits for Veterans

To take these benefits, you must first confirm your veteran status. You must be a veteran of the United States Army, which means that you have been an officer or enlisted person controlled by the Secretaries of Defense, Army, Navy, Marine Corps, Army air or coast guard. Merchant Marines, American Civil Marines, and members of the American Red Cross are not military members. With a few exceptions, such as difficulties, these conditions must also be met:

  • Discharged status was not "dishonorable."

  • You have been active for at least 24 months.

  • The 24 months (minimum) were continuous.


Federal tax exemptions for veterans

Military personnel benefit from federal tax exemptions depending on whether they are active or veteran, as they generally generate different types of income depending on their life and career. This section explains the tax exclusions that apply to veterans.


Military Disability Retirement Pay

If you receive a military disability pension, it is excluded from taxable income and is not part of the gross income calculation. This non-taxable amount includes any annuity, pension, or other disability benefit related to service received as a disabled veteran.

The United States Department of Veterans Affairs (VA) determines if you are a disabled veteran. In general, you can obtain a disability status if your disability is due to a combat-related illness or injury that meets any of the following conditions:

  • Came about during service

  • Aggravation or escalation during service

  • It was a direct result of your service (as determined by VA)


Payment of military pension

The Internal Revenue Service (IRS) treats pension payments as taxable income. If the military pension payment is based on age or seniority, you will continue to pay income tax.


Survivor's benefit scheme

As a retired military officer, you may have chosen to participate in the Survivor Benefit Plan (SBP). This insurance plan pays your beneficiaries monthly benefits after death to avoid financial hardship resulting from pension income loss. If you have an SBP, you will probably pay a monthly premium, which is automatically deducted from your pension payment.


Benefits for Veterans

Various other benefits for veterans are omitted from income tax. Some of these benefits are explained in more detail below. Here is a list of the tax-free IRS benefits for veterans:

  • Any bonus pay by a political subdivision or state due to service in a combat zone.

  • Benefits under a dependent care assistance program

  • Death advice for surviving military personnel who died after September 10, 2001

  • Disability benefits and disability pensions paid to veterans or their families

  • Education, training, and survival allowance 

  • Grants for home designs for wheelchair living

  • Grants for transportation for veterans who have lost sight of or their limbs.

  • Interest on insurance dividends which remain on deposit with the VA

  • Veterans insurance income and dividends paid to veterans or their beneficiaries (this includes veterans donation policy income paid before death)


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Thomas G Kinsella, ATP
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