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Veterans, Military and Their Families

 

How Can Military Veterans Maximize Their Tax Benefits?

Tax expert explains federal and state tax breaks for retired military members

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En español | Filing taxes once you're retired from the military may seem less complicated than it was when you were still in the service, yet military veterans can still get important benefits from the tax code. You don't want to miss out on them.

To help with your 2020 tax filings, we spoke with CPA and tax expert Lisa Greene-Lewis of TurboTax, who provided helpful information specifically for military veterans. Remember to file your taxes before this year's April 15 deadline. And don't forget: Tax advice that applies to civilians can benefit you, too.

Federal Taxes

You'll owe federal income taxes on military retirement pay. However, if you participate in the Survivors Benefit Plan, which supports your beneficiaries after you die, your premiums are excluded from your taxable income. Additionally, your military retirement pay is not considered earned income for Social Security tax calculations, and no Social Security payroll tax should be withheld from that pay.

Veteran education benefit payments received through the Department of Veterans Affairs (VA) for education and training are tax-free.

Disability benefit payments from the VA aren't taxable. This includes disability compensation and pension payments, disability grants for home or vehicle modifications (such as wheelchair ramps), and benefits under dependent-care assistance programs.


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Note: If you recently had an increase in your disability rating or were granted Combat-Related Special Compensation, you may be eligible for a tax refund. However, this can be applied only to the year that the VA reassessed your disability level, and you may have to file an amended return.

Other money from the VA that is not taxed:

  • Interest from VA life insurance policies
  • Benefits under a dependent-care assistance program
  • Money paid to a survivor of a member of the armed forces who died after September 10, 2001
  • Payments made under the compensated work therapy program
  • Any bonus pay from a state, county, city or town because of service in a combat zone

Missing money from stimulus checks may still be obtained through the Internal Revenue Service's (IRS) Recovery Rebate Credit.

"The IRS used information from the veteran's administration to issue the stimulus payments,” said Greene-Lewis. “So if you received a partial payment based on the information they have for 2019, you may be eligible for more in the form of a recovery rebate credit when you file your 2020 taxes."

Even if you owed no taxes or paid no taxes in 2020, you still might be eligible for the first and second stimulus payments as well as for any payments for eligible dependent children. However, you wouldn't be eligible for a stimulus check if your adjusted gross income (AGI) is greater than:

  • $99,000 if your filing status was single or married and filing separately
  • $136,500 for head of household
  • $198,000 if your filing status was married and filing jointly

However, because the second stimulus amount was lower than the first-round limit, individuals who earned more than $87,000 and couples who earned more than $174,000 jointly wouldn't have received a second-round check.

If eligible, you'll need to file the standard 1040 federal tax return form, or the 1040-SR tax return for people 65 or older, to get your missing stimulus money, which will be the form of a tax credit that will either lower the amount of tax you owe or increase the size of your refund.

State Taxes

Fast facts on state taxes:

  • States typically offer tax benefits only to veterans who were honorably discharged or released under honorable circumstances from active duty.
  • State benefits usually include some form of tax exemptions on property taxes, according to value.
  • Benefits are often transferred over to a spouse or surviving spouse of honorably discharged veterans.
  • Many states include additional benefits for veterans who are disabled.
  • Every state's revenue website outlines state benefits for veterans and how to apply for them.

Disabled veterans can qualify for property tax exemptions at the state level. These breaks, which are usually tied to a specific disability rating, can help a veteran save thousands of dollars. You can view a list of all property tax exemptions by state and disability percentage here. However, since tax laws often change, it is best to verify the tax structure with your taxpayer assistance center, state tax office or tax professional.

Military retirement pay may be untaxed or have other “special provisions” in some states. Review this list of states that do and don't tax military retirement pay here. If you are eligible, verify the tax law with your local taxpayer assistance center, state tax office or tax professional.

AARP Tax-Aide

AARP Foundation's Tax-Aide program, the largest free, volunteer-based tax assistance and preparation program in the U.S., stands ready to assist with state and federal returns. This year, Tax-Aide will offer several ways to get tax help safely during the pandemic.

"In this new environment of COVID, Tax-Aide has instituted a range of tax preparation assistance models that can help veterans, those currently in the military and others,” said Lynnette Lee-Villanueva, vice president and national director of AARP Foundation Tax-Aide. “From safely delivered in-person service, virtual assistance and hybrid options — we are here to help."

The nationwide tax help program is aimed at people 50 and older or those who have low to moderate incomes, but Tax-Aide is open to anyone free of charge. You don't need to be an AARP member to take advantage of Tax-Aide's knowledgeable volunteers, nor will there be any sales pitch for other services.

Specific state tax breaks for veterans

California: The Golden State waives state and local business license fees, taxes and fees for veterans who sell any goods except alcohol.

  • Veterans and disabled veterans have their own specific property tax breaks that waive a portion of what's owed.

Florida: Veterans with a minimum disability rating of 10 percent may be eligible for a $5,000 reduction in the assessed value of their property.

  • Veterans with total and permanent service-related disabilities may be eligible for a total exemption from property taxes. A similar exemption is available to veterans who use wheelchairs.
  • Veterans 65 or older who are partially or permanently disabled may receive a discount on the assessed value of property they own.

Georgia: Any qualifying disabled veteran may get an exemption of $60,000 or more from property taxes for county, municipal and school purposes.

  • Veterans with a 10 percent disability rating or more may be exempt from any occupation tax, administrative fee or regulatory fee imposed by local governments for 10 years on certain forms of business.
  • A disabled veteran who receives a VA grant for vehicle modifications is exempt from paying the state sales tax on the vehicle.

New Jersey: Veterans are eligible for a $6,000 exemption on their New Jersey income tax. Spouses (or civil union partners) are also eligible for an exemption if filing a joint return with a qualifying veteran.

  • Veterans may also qualify for an annual $250 property tax deduction.

New Mexico: Property tax may be exempt to up to $4,000 of its value.

  • The property of a veteran with a 100 percent disability rating — including joint or community property of the veteran and the veteran's spouse — may be exempt from property tax if it is occupied by the disabled veteran as their principal place of residence.

New York: There are several property tax exemptions available to veterans that provide full or partial tax breaks depending on when a home was purchased and when a veteran served.

— Source: CPA and tax expert Lisa Greene-Lewis, TurboTax

Aaron Kassraie writes about issues important to military veterans and their families for AARP. He also serves as a general assignment reporter. Kassraie previously covered U.S. foreign policy as a correspondent for the Kuwait News Agency's Washington bureau and worked in news gathering for USA Today and Al Jazeera English.

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