Tax Breaks for Disabled Veterans

Veterans who are disabled are eligible for tax breaks above and beyond what veterans without disabilities may get.

Tax breaks for disabled veterans are usually in the form of exemptions – money that is exempt from being taxed. But there are also tax credits and deductions that they can take advantage of.

Many states have their own tax breaks for disabled veterans, which vary by state. Many states that collect an income tax offer a disabled veteran property tax exemption. The 31 states that don’t exempt property taxes for disabled veterans still have policies that reduce property taxes.

Disabled veterans are also eligible for free or discounted tax preparation services, which can help them navigate all the different tax breaks and rules and find out what they qualify for.

Let’s take a look at tax breaks for disabled veterans and how to access them.

What Are Tax Breaks?

A tax break is anything that reduces the amount of income you must pay taxes on, or reduces the amount of tax you owe.

In general, the most common types of tax breaks are tax credits (which reduce the amount of income that your taxes are based on), deductions (which decreases a tax bill), and exemptions (a waiver from paying taxes on income or assets).

Many come into play when you file federal or state income taxes, but others, like those related to property taxes, must be applied for. And, of course, a state income tax break only applies in the 41 states that collect a state income tax.

How Tax Breaks for Disabled Veterans Work

The variety of tax breaks for disabled veterans range from federal to state deductions, refunds and exemptions. What you qualify for depends on where you live and, in some cases, the nature of your disability.

Circumstances also come into play – a property-tax exemption for disabled veterans would be for those who own a home and would normally have to pay property taxes. How that exemption works depends on the state you live in. (See below for more on property tax exemptions for disabled veterans.)

While some tax breaks are automatic – for instance, some federal grants and payments for disabled veterans aren’t taxed – others require action on your part.

Some kick in when you file your federal and state income tax. Others, particularly property tax exemptions, require filing paper work with your local tax collector.

To find out how to proceed on state exemptions, contact your local tax collection authority (for instance, the town or city tax collector). Your local VA or veterans services agency can also help you navigate whom to contact for what tax break.

Federal Tax Return for Disabled Veterans

Disabled veterans must file a federal income tax return to get tax breaks that aren’t exemptions — they are tax credits or deductions. This is important to do even if your income isn’t enough to pay taxes on.

The Defense Finance and Accounting Services sends a form 1099-R to disabled veterans that what compensation they’ve receive is subject to taxes.

Veterans whose circumstances change can file an amended return in order to get a federal tax refund related to those changes. Specifically, if:

• There’s an increase in the percentage of disability, as determined by the Department of Veterans Affairs.
• The veteran is granted Combat-Related Special Compensation. Veterans who are separated from the military cannot be taxed on their one-time lump sum disability severance payment. The Department of Defense is required to notify veterans who were taxed that they can file an amended return to get it refunded.

Filing an amended tax return means you’ve already filed a return and are now changing the information. This is done with Form 1040-X from the IRS. It can be done using a paper form, or can be e-filed.

The IRS recommends that those filing an amended return include all documents from the VA and Defense Finance and Accounting Services they’ve received regarding their taxes and disability status for the year they’re amending.

The IRS also recommends seeking the help of a tax professional, taking advantage of free tax preparation help for disabled veterans.

Is Retirement Pay Taxable for Disabled Veterans?

The IRS considers military retirement pay taxable income, so retired military members will have to pay federal taxes. While many states that have an income tax also consider retirement pay taxable, some don’t tax retired military income. If your state gives you a break on income taxes on your military retirement pay, however, you still have to pay the federal income tax on it.

There are federal tax deductions and exemptions that can reduce the amount of taxes disabled veterans pay:

• VA disability benefit payments aren’t taxed, including any disability compensation, disability pension payments, disability grants for home or vehicle modifications (such as wheelchair ramps), and benefits under dependent-care assistance programs.
• Out-of-pocket expenses for vehicle and home modifications to accommodate a disability can be deducted, with some qualifications.
• Survivors Benefit Plan premium payments (money you pay toward the SBP) can be deducted from taxable income.
• VA education benefit payments for education and training are not considered taxable income.

State Military Retirement Income Taxes

Aside from the nine states that don’t have a state income tax, another 20 don’t tax military retirement pay. Many of the states that do tax military retirement pay still offer tax breaks for retired and disabled veterans. Check with your state veterans bureau to see what your state provides.

Property Tax Exemption for Disabled Veterans

Since property taxes are paid at the local level, these exemptions are not part of your federal tax return.

Every state is different when it comes to property tax exemptions for disabled veterans. Those differences range from what’s needed to qualify – level of disability, value of house, and more – as well as how much the exemption is for.

For instance, in Alabama, to get a 100% exemption, the veteran must be 100% disabled. But in Colorado, a veteran who is 100% disabled gets a 50% exemption on the first $200,000 of the property’s value.

While in many states the veteran must be 100% disabled, others have a scale that can be as low as 10%. In Florida, a veteran with a 10% disability gets a small exemption, and it rises with percentage of disability.

Some states have caps on how much of the home’s value can be exempt, or are very specific about the type of disability the veteran must have, the age the veteran must be, or whether the veteran served in combat.

There is one thing all the states have in common: You must have a property that can be taxed in order to get a tax exemption. Property tax exemptions are for people who own homes, and the exemption is for the primary residence.

The place to start is your local tax assessor – this may be in your town or city, or your county, depending on where you live and how property is taxed. The name of the taxing entity should appear on your most recent property-tax bill. If you’ve just bought a property, that information will be included with the documents you signed at closing.

Disabled Veteran Sales Tax Exemption

While states that charge sales tax don’t have blanket “disabled veteran sales tax exemptions,” some states waive excise taxes, registration and other fees for disabled veterans’ vehicles or vehicle modifications to accommodate a disability. Most waivers apply to one vehicle per owner. Check with your local tax assessor to see if you qualify.

Disability Benefit Payments Aren’t Taxable

Benefits you receive because of your disability aren’t considered taxable income.

These include:

• Disability compensation paid to veterans or their families.
• Vehicle grants for veterans that pay for vehicle modifications to accommodate a disability.
• Grants to adapt a home to accommodate a disability.
• Dependent-care assistance program benefits.
• Education, training, and subsistence payments.
• Compensated work therapy program payments.
• State combat zone service bonuses.

The Defense Finance and Accounting Service sends disabled veterans Form 1099-R, which shows what part of your VA income you must pay taxes on.

How to Apply for Disabled Veteran Tax Breaks

Some tax breaks for disabled veterans are automatic, while others require filing an application or other paperwork.

Some disability deductions or exemptions require filing a tax return, even if you wouldn’t normally file one because of your disability. This goes for both state and federal taxes, depending on which government level offers the tax break. Remember, even if a state offers a specific tax break, that doesn’t negate any federal taxes you may have to pay.

VA disability benefits are automatically exempt because they aren’t included in your taxable income, so no application process is required. These include:

• VA disability compensation paid to veterans or their families – this includes pension and insurance payments.
• Vehicle grants for veterans who must use an adapted vehicle to accommodate a disability
• Grants to adapt a home to accommodate a disability
• Dependent care assistance program benefits

Disabled Veterans May Qualify for Other Tax Breaks

The IRS has many disability tax breaks for disabled individuals in addition to veteran-related tax breaks. There are tax breaks not only for the person with the disability but also for those who care for them, and even employers. Veterans with a disability may qualify for these credits, deductions and exemptions as well as those specifically designed for them.

To get the tax breaks, the person applying must file a federal tax return.

Some are:

• Legally blind taxpayers are entitled to a higher standard deduction.
• Impairment-related work expenses, including attendant care in the workplace and other accommodations needed to work, are deductible.
• Tax Credit for the Elderly or Disabled can be claimed by those 65 or older who are retired on permanent and total disability.
• Medical expenses for diagnosis, cure, mitigation, treatment, or prevention of disease are deductible, including admission fees and transportation to and from a medical conference that addresses the specific disability or disease.
• Earned Income Tax Credit is for those who have low to moderate earned income, this includes disability benefits from an employer’s disability retirement plan.
• EITC for parents of children with disabilities. Parents of a child (of any age) may qualify for this credit if the qualifying child is permanently and totally disabled.
• Dependent child. Parents of a disabled veteran (or any disabled child), regardless of age, can claim this credit if the child is permanently and totally disabled and cannot engage in any substantial gainful activity.
• Dependent with a disability working at sheltered workshop. If a dependent child (of any age) or relative works in a sheltered workshop, the income from services they perform isn’t taxable if they meet other dependency qualifications.
• Child or Dependent Care Credit. Parents or spouses who pay someone to come into the home and care the person with the disability may qualify for this tax credit.
• Barrier Removal Tax Deduction. Businesses can take an annual deduction for expenses related to removing physical, structural, and transportation barriers for people with disabilities.
• Work Opportunity Tax Credit. An incentive to employers to hire individuals from population groups that have a high unemployment rate or special employment needs, including veterans with disabilities.