Federal Tax Exclusion for VA Benefits

VA disability compensation, pension, DIC, education and grant payments are not federal taxable income, and retired pay replaced by a retroactive VA rating can be refunded.

Also called: tax free VA, disability compensation tax, Publication 525, retroactive VA rating refund, Form 1040-X.

For: Veteran or service member, survivor.

Where it applies

Applies in states and territories.

Federal

Under 38 U.S.C. 5301 and IRC section 104, VA disability compensation and pension, DIC, Survivors Pension, GI Bill and other education payments, adapted housing and automobile grants, and VA life insurance proceeds are not taxable federal income. VA does not issue a 1099 for them. When VA awards a rating retroactively to a military retiree, the retired pay for the retroactive period is excludable up to the VA benefit the retiree would have received; the retiree files an amended return, Form 1040-X, for each affected year, generally within the later of three years from filing or two years from payment, extended for VA determinations by IRC 6511(d)(8). A lump-sum disability severance payment is fully excluded once VA awards compensation, and the Combat-Injured Veterans Tax Fairness Act of 2016 provides a set refund to veterans whose combat-related severance was taxed. CRSC is excluded; CRDP is taxable, because it is retired pay. States set their own rules for retired pay.

Thresholds

No rating or income gate is recorded. Read the detail and the official source.

Sources

Publication 525, Taxable and Nontaxable IncomeOfficial
Publication 3, Armed Forces' Tax GuideOfficial

Updated

Last updated 2026-10-08.

What changed then:

First published.

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Disclaimer

VetTOC is not affiliated with the U.S. Department of Veterans Affairs or the Department of Defense. Information is for reference only and is not an eligibility determination. Verify with VA, the relevant state or territory, or an accredited VSO.