Military Appreciation Month – Tax Benefits and Credits for Veterans and Active Duty

Military Veterans and Active Duty Personnel may qualify for special tax benefits. It is important for you to understand what is excluded from income, what is taxable, and what credits veterans can claim. Below you will find some highlighted points on the matter. For more information about these benefits and credits please visit Tax Information for Members of the Military on the IRS Website.

Disability benefits given by the VA are not included in gross income. This includes payments made for things such as disability compensation, pension payments, grants for homes customized for wheelchairs, grants for motor vehicles for Veterans who have lost their sight or limbs, and dependent-care assistance programs. Retirement pay, not including Military Disability Retirement pay, is however taxable.

Any personnel working in or around the area of a combat zone may not pay taxes on their combat pay. If those working around the combat zone are proven to be in direct support of the military operations within the combat zone they may also qualify.

The $100,000 death benefit paid to the survivors of a fallen Armed Forces member is not taxable. This includes any deaths occurring after 9/10/2001.

Those in the Reserve who are required to stay overnight more than 100 miles away from home during service, for things such as drill or meetings, can deduct any unreimbursed travel expenses. To find out how much can be deducted use Form 2106 or 2106-EZ. The adjustment amount will then be entered on line 24 of the 1040.

Veterans who received the one-time disability severance payment from the Department of Defense are not taxed on this income. Those who have combat-related injuries and then separated from the military can avoid any tax liability on this severance pay. For those taxpayers who have prior year returns where this income was taxable, please encourage them to contact the Department of Defense to see if they need to file an amended return and receive a refund.

Members of the Armed Forces may choose to have their nontaxable combat pay included in their earned income to receive the Earned Income Tax Credit. If a taxpayer decides to include this income, all the combat pay must be included. Because this could hurt the taxpayer more than it helps, we advise you to calculate the tax return both ways to find out which is best for the taxpayer.