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Retired Military Finances 101: No. Your VA Disability Benefits Can Affect Your Income Taxes Thumbnail

Retired Military Finances 101: No. Your VA Disability Benefits Can Affect Your Income Taxes

Taxes

I hear people say it all the time in on-line discussion groups. "Don't worry about your VA benefits when you do your taxes. They're not taxable." That statement is partially true. But it isn't the full story.

How Do VA Disability Benefits Affect My Income Taxes?

One way VA Disability Benefits affect your taxes is in the calculation of the Sales Tax Deduction. Here's a little background. If you itemize your deductions, you can elect to deduct state income taxes or sales tax. Since many of us retire to states without an income tax our only choice is to take the sales tax deduction (if you itemize). Others of us end up in places with high property taxes and an income tax (can anyone say NCR?). Those same states won't allow you to deduct your state income tax paid when calculating your state income tax due. But they will allow you to deduct the sales tax. Often, the sales tax deduction will be enough, when combined with those high property taxes, will take you to the limit for the combined Federal State and Local Tax (SALT) deduction which is currently $10,000. In both cases it can be to your benefit to get as high of a sales tax deduction as possible. Enter your VA Disability Compensation.

There are two ways to figure out your sales tax deduction. The first is your actual taxes paid (that's a lot of receipts to keep). Or...you can use a formula to calculate your sales tax deduction based on your income. The calculation starts with your Adjusted Gross Income (AGI). The IRS instructions for Schedule A to Form 1040 then instructs you add non-taxable income to your AGI prior to completing the calculation. The IRS then specifically calls out Veterans' benefits as one of the non-taxable income sources. So, while VA benefits don't count as income when calculating your income tax, they can reduce your income if you itemize and take the sales tax deduction.

Are There Other Ways My VA Benefits Affect My Income Taxes?

There aren't too many other ways VA Benefits affect your taxes. But there is one significant way they could. It has to do with a retroactive disability award of less than 50%. This is an article on its own. The good news is you can read the article if you clink on the link (Strickland Decision) to it below.

Do My Active Duty Tax Free Benefits Affect My Taxes in the Same Way?

Yes. You can also include your BAH, BAS and other tax-free benefits when calculating the Sales Tax Deduction. You can also count combat pay in the amount as well.

Military Finances are Different

If you're working with a typica financial planner/advisor or tax preparer they probably won't even know to ask about tax-free benefits when talking about your taxes. That isn't the only time your finances are different than a civilian's finances. That's why we think Active and Retired Senior Military Officers and NCOs should work with a financial planner that understands your unique benefits. If you'd like to find out how we work with clients just like you, use the button below to schedule a free, initial consultation.

The Strickland Decision (and IRR 78-161) and You


Military Finances 201: 2025 by the Tax Numbers


Retired Military Finances 201: The New "Extra-Mega-Special-Bonus Catch-up Contribution"


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