Some veterans aren’t sure how their military service will affect their taxes. In fact, military retirement benefits are taxed at the federal level, while disability compensation benefits and disability retirement benefits are generally exempt. Additionally, most states either do not tax military retirement income or only partially tax it. (More on that later). However, the District of Columbia and California fully tax military pensions.
Veterans should keep in mind that they may be surprised at the amount of federal income tax they owe when they file their first tax return after leaving the military.according to I.R.S.Combining military retirement income with income from a civilian job or a spouse’s income can push veterans into a higher federal income tax bracket.
One way to address this is to assess and adjust tax withholdings for other employment and military retirement benefits. The IRS also has an online Withholding tax estimation tool A tool that helps you determine in advance how much tax you need to pay. However, veterans have several tax breaks and benefits, some of which can lower their taxable income. Here are some examples:
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State and federal tax breaks for veterans
Note: Eligibility rules and requirements vary, so not all tax benefits are available to all veterans.
- Tax benefits for disabled veterans. Disabled veterans may be eligible for tax breaks at the federal and state level. Disability benefits are Department of Veterans Affairs (VA) is excluded from gross income and is not taxed. Disability retirement benefits, other disability compensation payments, and benefits received under dependent assistance programs are also generally tax-free.
- Veterans Education Benefits. Veterans receive Payment of education, training, or living expenses from the Veterans Administration You do not have to report the payments as income on your federal tax return.
- Special Tax Refund Considerations. Veterans may be eligible for a federal tax refund in special tax situations, such as increased rates of disability or combat-related special compensation awarded after discharge and disability occur simultaneously.
Note: Veterans may be required to file a tax return to claim a disability credit or exemption. If your income changes, you must reevaluate your eligibility and file an amended return if necessary. Special tax considerations may also require you to file an amended return. Evaluate your disability exemptions and deductions annually and consult a trusted tax advisor if necessary.
Property taxes and disabled veterans
If you’re a military veteran, it’s worth checking to see if you qualify for a state property tax exemption. Generally, these exemptions are aimed at disabled veterans, but eligibility criteria and rules vary by state.
Seniors age 65 and older may also qualify for property tax relief. Checking your state’s eligibility guidelines may help reduce your property tax burden.
Are military members eligible for the Earned Income Tax Credit?
The Earned Income Tax Credit (EITC) is often overlooked not only by eligible veteran and military households, but also by people with disabilities, people living in nontraditional households, and households without children.
This credit is available to people who earned less than $63,698 in 2023, and may reduce the amount of taxes owed or receive a tax refund. Last year, 31 million eligible workers and their families received about $64 billion in earned income credits, and the average EITC amount was just over $2,000.
The IRS reports that approximately 2 million veterans and military households have received this credit. (Some states also offer an earned income tax credit.)
States that do not tax military veterans
Most states fully exempt military retirement benefits from state income taxes. However, as mentioned above, some states do not give preferential treatment to military revenues when it comes to tax treatment. Additionally, other states offer only partial tax breaks for how veterans’ retirement income is taxed.
States that still partially tax retirement income include Delaware, Georgia, Idaho, Kentucky, Maryland, Montana, New Mexico, Oregon, Vermont, and Virginia . The District of Columbia and California still fully tax military pensions.
