Veteran tax breaks, in plain English.

Federal tax — what's tax-free vs. taxable

Tax-FREE for federal income tax

• VA disability compensation — never taxed
• VA pension — never taxed
• DIC (Dependency & Indemnity Compensation) — never taxed
• Disability severance pay for combat-related injuries — refundable if originally taxed (see below)
• Combat pay (Combat Zone Tax Exclusion) — for time in a designated combat zone
• Death gratuity ($100,000 to surviving family) — not taxed
• Adoption assistance through DoD
• Housing allowances (BAH) — non-taxable
• Subsistence allowance (BAS) — non-taxable

TAXABLE

• Military retirement pay (federal income tax)
• SBP annuity (Survivor Benefit Plan)
• Active duty base pay outside combat zone
• Civilian wages and self-employment income
• Rental income, investment income

State tax — varies dramatically

9 states with no state income tax (military retirement effectively untaxed)

Alaska, Florida, Nevada, New Hampshire (no wage tax), South Dakota, Tennessee, Texas, Washington, Wyoming.

States that fully exempt military retirement

~30 states, including Alabama, Arkansas, Connecticut, Hawaii, Indiana, Iowa, Kansas, Kentucky, Louisiana, Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Montana, Nebraska, North Carolina, North Dakota, Ohio, Oklahoma, Pennsylvania, South Carolina, Utah, West Virginia, Wisconsin (full or near-full).

Always check your state veterans page — laws change yearly.

Disabled veteran property tax exemptions

Most states offer significant property tax exemptions for disabled veterans, ranging from $3,000 in assessed-value reductions to full homestead exemption. Texas, Florida, Maryland, Michigan, Mississippi, New Jersey, Oklahoma, South Carolina offer full exemption for 100% disabled veterans on primary residence. Many states extend the exemption to surviving spouses.

Application is at the county level. Bring your VA disability award letter, DD-214, and proof of residence to the county assessor.

CRSC and CRDP — recovering withheld retirement

Until 2003, military retirees with VA disability had to waive an equal amount of retirement pay to receive VA disability — meaning they got the same total dollar amount, but the disability portion was tax-free. Two programs now restore concurrent receipt:

• CRDP (Concurrent Retirement and Disability Pay) — for military retirees with 20+ years and VA disability rated 50%+. Restores full retirement pay alongside VA disability. Phased in fully by 2014.
• CRSC (Combat-Related Special Compensation) — for retirees with combat-related disabilities. Tax-free supplement that restores the offset. Available for any rating including under 50%.

If you're medically retired or have combat-related disabilities, CRSC vs. CRDP can mean thousands per year. You can switch annually based on which is better. DFAS CRSC/CRDP info.

Disability Severance Pay — taxable refund

Veterans medically separated between 1991 and 2016 who had federal taxes withheld from disability severance pay can claim a refund of those taxes. The 2017 Combat-Injured Veterans Tax Fairness Act allowed this retroactively. Many veterans missed the original deadline; check with a tax professional or VSO.

Free tax filing

• MilTax (Military OneSource) — Free Federal + State for active duty, retirees, and family. militaryonesource.mil/miltax
• VITA (Volunteer Income Tax Assistance) — Free for low-income, including most veterans. IRS-certified volunteers.
• Free File — IRS partner program. Most veterans qualify.
• TurboTax — Free Federal + State for active duty. Various discounts for veterans.
• H&R Block — discounts for active duty.

Common mistakes

• Reporting VA disability as taxable income on Form 1040 — never report it
• Missing CRSC/CRDP eligibility for medical retirees
• Not claiming property-tax exemption after a rating increase
• Not filing for the disability severance pay tax refund (1991-2016 medical separations)
• Paying for tax software that's free for active duty (MilTax)

Get help