What Are Some Tax Breaks for Veterans?

Q. Due to inflation, rising costs of home ownership, and increased property taxes, everything is so expensive these days. As veterans, my husband and I can use any tax breaks we can get. I know that you are accredited to work with veterans at your firm. Do you know what tax breaks my husband and I might be eligible for this year? Thank you so much for your help.

A. Thank you to you and your husband for your service to our country!

Tax time is upon us! In fact, the IRS began accepting tax returns on Monday, January 23. The agency says that it is expecting more than 168 million tax returns this season, so it may be a good idea to file early! 

As veterans, you and your wife may indeed be eligible for certain tax benefits under the tax code.  

Tax Breaks for Veterans 

Here are five tax breaks you should be aware of if you’re a qualifying veteran: 

1. Tax-free income

Most military pensions are federal taxable income. However, if you receive disability payments instead of or in addition to your pension, those payments are tax-free. You don’t even need to report them on your tax return. Here are some other examples of tax-free income: 

• Premiums for the Survivor Benefit Plan are excluded from taxable income. The Survivor Benefit Plan allows a military retiree to ensure, after death, a continuous lifetime annuity for certain dependents.  

• The Veterans Aid and Attendance Benefit, or Veterans Pension Benefit with Aid and Attendance, is a little known program that pays tax-free income to help veterans who qualify pay for home care, assisted living, or nursing home care, up to $2,229 a month for a veteran, or $1,438 a month for the unmarried widow of a veteran. Veterans or their widows must meet certain income and asset requirements in order to qualify for this program. 

• These benefits can help offset the cost of hiring help or compensate a child who acts as a caregiver. 
• Any veteran who was not dishonorably discharged and who served at least 90 days on active duty, with at least one day during wartime, may be eligible for the Veterans Aid and Attendance Pension Benefit, which helps pay for unreimbursed medical expenses for veterans and their surviving spouses. Aid and Attendance is an incredibly valuable program for those veterans who need assistance with the activities of daily living. 
• Here at the Farr Law Firm, we work with veterans and their spouses to evaluate whether they qualify, or may potentially qualify in the future, for the Veterans Aid and Attendance Benefit and/or Medicaid, and we deal with all the paperwork. Learn more here.  

• Other VA benefits that aren’t counted as taxable income include:  

• Grants for constructing or modifying a home to make it wheelchair accessible; 
• Grants for motor vehicles for veterans who lost their sight or the use of their limbs; 
• Interest from VA life insurance policies; 
• Benefits under a child-care assistance program; 
• Money paid to a survivor of a member of the armed forces who died after Sept. 10, 2001; 

• Payments made under the compensated work therapy program. 

• If you recently had an increase in your disability rating or were granted Combat-Related Special Compensation, you may be eligible for a tax refund. However, this can be applied only to the year that the VA reassessed your disability level, and you may have to file an amended return. 

2. Additional time to file amended tax returns

Typically, you have three years from the date you filed your tax return to amend the return and get a refund of overpaid taxes. In some cases, veterans have an extended window for filing amended tax returns. 

A few years ago, the National Veterans Legal Services Program, a veterans’ advocacy group, discovered that the Defense Finance and Accounting Service had been using an outdated process for withholding taxes from disability severance payments. As a result, many veterans are owed refunds on lump-sum disability payments. Unfortunately, relatively few veterans knew about those refunds in time to request a refund within the typical three-year window for filing an amended tax return. 

In 2016, Congress passed the Combat-Injured Veterans Tax Fairness Act of 2016, which allowed certain veterans additional time to file an amended return and receive a tax refund. The Department of Defense (DOD) mailed letters to affected veterans in July 2018 and July 2019. 

Veterans who received these letters must file Form 1040-X for the tax year the disability severance payment was made by the later of: 

• One year from the date of the DOD notice. 
• Three years after the due date for filing the original tax return for the year the disability severance payment was made. 
• Two years after the tax was paid for the year the disability severance payment was made. 

If you didn’t receive a notice from the DOD, but you did receive a disability severance payment after January 17, 1991, you can still file an amended return. You’ll need to contact the VA to obtain documentation to submit with your Form 1040-X. 

1. Tax-free education assistance 

Veterans education benefit payments received through VA for education and training are tax-free. 

If you serve or served in the military and are receiving Department of Veterans Affairs (VA) education benefits, the IRS excludes this income from taxation. Publication 970, Tax Benefits for Education, the authoritative source for all education tax matters, covers this tax exclusion. 

Veterans and their children may receive education and training benefits, such as the Post-9/11 GI Bill, to help pay for undergraduate, graduate, or on-the-job training. This education assistance is not taxable, and it doesn’t need to be declared on your tax return. 

4. Earned Income Tax Credit

Many veterans are also eligible for the Earned Income Tax Credit (EITC), which is designed to benefit low- to moderate-income workers and their families. 

The EITC is a refundable credit, meaning if it reduces your tax liability below zero, you can receive a tax refund greater than the amount you paid in through withholding or estimated tax payments. 

To qualify for the EITC, you must have earned income. This includes wages or salaries, but it can also include long-term disability benefits received before the minimum retirement age. The income limits and maximum credits vary each year.  

5. State Taxes

Disabled veterans can qualify for property tax exemptions at the state level. These breaks, which are usually tied to a specific disability rating, can help a veteran save many thousands of dollars every year. You can view a list of all property tax exemptions by state and disability percentage here. However, since tax laws often change, it is best to verify the tax structure with your taxpayer assistance center, state tax office, or a tax professional. 

Military retirement pay may be untaxed or have other special provisions in some states. Review a list of states that do and don’t tax military retirement pay here. If you are eligible, verify the tax law with your local taxpayer assistance center, state tax office, or tax professional. 

• States typically offer tax benefits only to veterans who were honorably discharged. 
• Benefits are often transferred to a spouse or surviving spouse of honorably discharged veterans. 
• Many states include additional benefits for veterans who are disabled. 

• Almost all states have a department of revenue website that outlines state benefits for veterans and how to apply for them. 

There are property tax exemptions for veteran homeowners in Virginia, Maryland, and Washington, DC. Read today’s Critter Corner for more information about property tax exemptions in the DMV area! 

Need Help Filing Your 2022 Taxes? 

Jim Jaxtheimer, attorney and CPA, is now Of Counsel to the Farr Law Firm and can help our clients with completing income tax returns. Jim has been a licensed Certified Public Accountant since 1994 and a tax attorney since 2004, and is licensed to practice law in Virginia, Maryland, and the District of Columbia. 

The Farr Law Firm Works with Veterans Enrolled in the Wounded Warrior Project 

At the Farr Law Firm, we work with veterans enrolled in the Wounded Warriors Project Independence Program, which helps eligible veterans who have a spinal cord injury, a moderate to severe traumatic brain injury, or a neurodegenerative disorder such as MS or ALS. The Wounded Warrior Project also offers a multitude of other services that veterans (even nondisabled veterans) may benefit from. Contact the Wounded Warrior Project Resource Center at 888.997.2586 and one of their coordinators will be available to assist you and begin to assess the programs within WWP that might be helpful for you.  

Let Us Help You Get All the Benefits to Which You’re Entitled 

Applying for veterans’ pension benefits can be an arduous process. Here at the Farr Law Firm, we work with veterans and their spouses to evaluate whether they qualify or may in the future qualify for the Veterans Aid and Attendance Benefit and/or Medicaid, and we deal with all the paperwork. We can also indirectly assist disabled veterans apply for disability compensation benefits.  

As a Certified Elder Law Attorney and an Accredited Attorney with the U.S. Department of Veterans Affairs, I understand both the Veterans Aid and Attendance Benefit and the Medicaid program and the interaction between both entitlement programs. Please call us at any time to make an appointment for a consultation: 

Northern Virginia Veterans Aid and Attendance Planning: 703-691-1888  
Fredericksburg, VA Veterans Aid and Attendance Planning: 540-479-1435  
Rockville, MD Veterans Aid and Attendance Planning: 301-519-8041  
Annapolis, MD Veterans Aid and Attendance Planning: 410-216-0703  
Washington, DC Veterans Aid and Attendance Planning: 202-587-2797