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Tax Guide for Military & Veterans

Tax Guide for Military & Veterans

Wouldn't life be beautiful without taxes? You can't avoid them entirely, but as an active member of the U.S. military or veteran, you have access to tax benefits not usually available to other Americans. In return for services to the country, the federal government and individual states have implemented tax breaks to ease your financial burden or ease your return to civilian life.

These tax benefits related to military service fall into three groups:

Federal Income Tax Exclusions 

The U.S. government allows you to exclude certain types of income from the calculation of adjusted gross income on your tax return. In other words, part of your income is exempt from tax. By totally excluding certain income, you can effectively reduce the total amount of income tax you owe or increase your refund, and also affect the number of tax credits you receive.

State Income Tax Exclusions 

States also designate certain types of income as tax-exempt for military personnel and veterans, so they may be excluded from gross income calculations. Because states differ in how they treat current military income and veterans' benefits, check the tax laws of the state in which you permanently reside to find out what income may be excluded from state income tax.

Other Non-Taxable State Benefits 

In addition to tax benefits, many states offer additional non-taxable benefits. Some states levy no property taxes, or only partial amounts, on the principal residence of veterans or returning military personnel. Some other states may waive some or all annual vehicle taxes or fees for veterans or military residents. Again, you will need to consult the tax laws specific to your state of permanent residence.

Veterans Tax Eligibility

To take advantage of veterans' tax benefits, you must first confirm your veteran status. You must be a United States Armed Forces veteran, which means you were an officer or enlisted personnel in the Departments of Defense, Army, Air Force, Navy, Marine Corps, or Coast Guard. Merchant Marines (U.S. Civilian Marines) and American Red Cross members are not military members. With some exceptions, such as financial hardship, you must also meet these requirements:

  • The 24 months (minimum) were continuous.

  • You have been on active service for at least 24 months.

  • Your discharge status was not "dishonorable."

Federal Tax Exclusions for Veterans

The federal government provides tax breaks to military personnel depending on whether they are military or veterans. They often generate different types of income due to their life stages and careers. This section explains the tax exclusions that apply to veterans.

Military Retirement

The IRS considers your retirement as taxable income. If your military retirement pay is based on length or age of service, you will still pay income tax.

Survivor benefit plan

As a retired military member, you may have elected to participate in the Survivor Benefit Plan (SBP). This insurance plan pays monthly amounts to your beneficiaries after your death to prevent financial hardship resulting from loss of retirement income. If you have SBP, you will likely pay a monthly premium which will automatically be deducted from your pension.

Military disability retirement pay

If you receive military disability pay, it will be excluded from taxable income and will not form part of your gross income calculation. This tax-free amount includes any annuities, pensions, or other service-related disability benefits you receive as a disabled veteran.

The U.S. Department of Veterans Affairs (V.A.) determines if you are a disabled veteran. Generally, you can obtain disabled veteran status from a V.A. if your disability is caused by a combat-related injury or illness that meets one of the following requirements:

  • Aggravated or intensified during service

  • Got it during the service

  • Was as a direct result of your service (as determined by the V.A.)

What if the V.A. grants you disabled veteran status after you retire, and you have already paid military retirement taxes based on years of service?

Benefits for Veterans

Many other veterans' benefits are not taxable. Here is the IRS list of non-taxable benefits for veterans:

  • Any bonus payment from a state or political subdivision due to service in a combat zone.

  • Benefits for homes designed for wheelchair living

  • Benefits under a dependent care assistance program

  • Death grants to surviving service members who died after September 10, 2001

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

  • Education, training, and subsistence support

  • Grants for motor vehicle benefits for veterans who have lost sight or use of a limb

  • Income from veterans' insurance and dividends paid to veterans or their dependents (this includes income from a veterans endowment policy paid before death).

  • Interest on insurance dividends deposited with the V.A.

Life Insurance

The VA offers seven types of life insurance; for the most part, V.A. Life insurance earnings are not taxable. Insurance proceeds may be taxable in certain situations, such as when proceeds are left on the property, including the veteran's property. This income is used to determine the value of the veteran's estate and is subsequently taxed.

The interest income you receive from your life insurance proceeds is not taxable. For instance, if life insurance proceeds are paid to a veteran's beneficiary in 36 equal monthly installments, the interest included in the installments is not taxable.

Education and Training 

A military discharge means it's time to assimilate into civilian life. This may mean earning an undergraduate or graduate degree from a college or university or taking other training relevant to your calling. V.A. can help cover the costs of your education or training by providing stipends for tuition, housing, and other costs. You or your dependents may receive benefits through some initiatives such as the Post-9/11 GI Bill®, the Yellow Ribbon Program, the Montgomery GI Bill, and the Survivorship and Addiction Education Assistance Program. One of the benefits of these grants is that they are tax-exempt.

State Tax Exclusions for Veterans

If you're lucky enough to live in one of the seven tax-free states, you must file your federal tax return and pay Uncle Sam's income tax. Otherwise, for active duty members and veterans living in other states, knowing what incomes are subject to or excluded from a state's income tax is essential. Remember that states with no income tax will also tax other property, including real estate and vehicles.

Pension waiver

Many states exempt veterans' pensions or military pensions from income tax. In addition to the seven states that have no income tax and therefore do not tax your military pension, about 18 other states exclude your military pension from taxable income. Of the remaining states, eight impose a limited or conditional tax. This means that most states don't tax military retirement, so chances are your state won't take a bite out of your retirement check.

Property tax exemption

More than 25 states offer partial or full tax exemptions for disabled veterans. Some states that offer full principal residence property tax exemptions for qualified veterans include Alabama, Arkansas, Hawaii, Michigan, Missouri, New Hampshire, and Virginia. Many states do not offer full exemptions but rather limited, contingency-based exemptions to veterans over a certain age or below certain income levels. Certain dollar amounts or property values limit some states' partial exemptions. For instance, a disabled veteran in Georgia is eligible to receive a tax credit of $60,000 for a primary residence. In Idaho, the disabled veteran must have a certain percentage of a service-related disability.

State DMV tax exemption

Most Americans drive cars, and states are willing to tax you if you own one. Some states will grant disabled veterans a license free of vehicle taxes, registration fees, and other fees. Veterans may be required to provide proof of disability. Your state may limit your exemption to a motor vehicle that you own and use for personal, non-business purposes. Some states may offer partial waivers of registration fees; Connecticut, for example, has granted tax/licensing exemptions to veterans and special vehicle registration tax exemptions to Medal of Honor recipients and ex-prisoners.

College tuition waiver

Once discharged from the military, many veterans are forced to return to school to pursue civilian careers. Many states offer veterans education cost reductions by waiving tuition and fees in their public schools. States sometimes waive tuition for children of deceased veterans in certain age ranges.

How Veterans Can Get State Tax Benefits

Each state operates its own V.A. office, and it's worth researching yours to make sure you're getting the most beneficial tax benefits and programs for your situation. You now know that states offer different benefits, tax breaks, or exemptions to veterans, and your state may offer a benefit that is not available to veterans in other states. 

 A caveat: you may be temporarily stationed in one state but be entitled to V.A. benefits in another state. Your veteran affairs benefits are tied to the state where you permanently live.

Ways to Apply for Veterans Benefits

The first step in applying is to register with the government through its self-service website. This joint VA/US Department of Defense website offers several resources covering veterans' issues.

After registering and receiving D.S. Access, a secure self-service I.D. account with access to many federal government websites, you will be able to access your records, including official military documents. You can also register your direct deposit information for the benefits to which you are entitled, check the status of your disability claims, and apply for your benefits.



Pat Raskob
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