Veterans Day is an official United States holiday that honors people who have served or currently serve in the armed forces. Every year, on the 11th of November, we take the time to acknowledge the brave men and women who ask for little recognition for putting themselves in harm’s way to preserve our freedoms and way of life.
The IRS recognizes our soldiers with significant tax return benefits. As with all deductions and credits, it’s important to familiarize yourself with them so that you can make the most of your tax return. We’ve provided a few tips for you below, and for an overview of all the tax considerations related to military service, you can check out IRS Publication 3 - Armed Forces’ Tax Guide.
Veterans With Disabilities
If you’re a disabled veteran, you may be eligible to claim a federal tax refund based on an increase in your percentage of disability from the Department of Veteran Affairs or if you applied for and were granted Combat-Related Special Compensation after an award for Concurrent Retirement and Disability. Special tax considerations for disabled veterans occasionally result in a need for amended returns.
VA Disability Benefits
You should not include disability benefits you receive from the VA in your gross income. Payments which are considered disability benefits include:
- Disability compensation and pension payments for disabilities paid either to veterans or their families
- Grants for homes designed for wheelchair living
- Grants for motor vehicles for veterans who lost their sight or the use of their limbs
- Benefits under a dependent-care assistance program
Combat Zone Provisions
If you serve in a combat zone, the military pay you earn while serving in that combat zone is excluded from your gross income for tax purposes. This means that your pay earned during this period is effectively tax-free. Nontaxable income, however, is capped at the highest enlisted pay level plus hostile fire or imminent danger pay, which is then added onto your salary. Combat pay exclusions are only available for service members who are on active duty or who are recovering from injuries sustained while on active duty.
Military Family Tax Relief Act
When the Military Family Tax Relief Act was passed in 2003, it created the following tax breaks for military personnel:
- Death Benefits. Death gratuity paid to survivors is $12,000 and is nontaxable effective for deaths occurring after September 10, 2001.
- Sale of Principal Residence. Suspends the 5-year ownership-and-use period prior to the sale of a residence.
- Deduction for Overnight Travel Expenses of National Guard and Reserve Members. Reservists who report for service and stay overnight at a place that is more than 100 miles away from their residence may deduct reimbursement travel expenses, like gas, food, and lodging.
- Combat Zone Extensions Expanded to Contingency Operations. As of November 11, 2003, extensions given to service members in combat zones are also granted to personnel serving in a contingency operation.
- Dependent Care Assistance Programs. Dependent care assistance programs for military personnel are excludable benefits.
- Military Academy Attendees. The 10% tax on payments from a Qualified Tuition Program or Coverdell Education Savings Account that are not used for educational expenses does not apply to attendees of the US Military, Naval, Air Force, Coast Guard, or Merchant Marine Academies, so long as the payments do not exceed the costs of advanced education. This is effective for tax years after 2002.