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Veteran Tax Benefits: Tips to Maximize Your Return
An expert explains federal and state tax breaks for retired service members
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Filing taxes after leaving the military may be simpler than it was during active service, but it's still worth paying attention to the details; veterans can benefit from important tax breaks that may lower their tax bill.
To help with your tax filings, we spoke with CPA and tax expert Lisa Greene-Lewis of TurboTax, who provided helpful information for military veterans. Remember to file your taxes before this year’s April 15 deadline.
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Federal tax breaks
- Disability payments from the Department of Veterans Affairs (VA) are not 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. These payments should not be included in your gross income.
Note: If your VA disability rating increased or you were granted Combat-Related Special Compensation, you may be eligible for a tax refund. However, this can only be applied to the year the VA reassessed your disability level and typically requires filing an amended return for that tax year.
- Survivor Benefit Plan (SBP) premiums are deducted from pretax retirement pay, which lowers your taxable income.
- Military retirement pay is not subject to Social Security payroll taxes, though it is taxed at the federal level as income.
Other VA benefits that aren’t taxed:
- Veteran education benefit payments received through programs such as the GI Bill and the Veteran Readiness and Employment program are not considered income.
- Life insurance proceeds paid after a veteran dies are generally tax-free. However, any interest paid on those proceeds or interest on insurance dividends left on deposit is taxable.
- Dependency and Indemnity Compensation (DIC) payments made to all spouses, dependents and parents are not taxed.
- Military death benefits paid to a survivor of a member of the armed forces who died after Sept. 10, 2001 are not taxable.
State tax breaks
Disabled veterans can qualify for property tax exemptions at the state level. These tax breaks, usually tied to a specific disability rating, can help veterans 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, verifying the tax structure with your local taxpayer assistance center, state tax office or tax professional is best.
Military retirement pay may be untaxed: Many states do not tax military pensions, while some offer partial exemptions and very few tax them fully or partially. If you believe you are eligible, verify the tax law with your local taxpayer assistance center, state tax office or tax professional.
Specific state tax breaks for veterans
- Business license taxes and fees are waived for qualifying honorably discharged veterans (excluding alcohol sales).
- Service members, veterans and eligible family members may qualify for a property tax exemption of up to $4,000 of a home's assessed value. Eligibility is subject to asset limits, which apply to the total value of any secondary property and other assets, not the primary residence.
- Veterans with a 100 percent disability rating — or their unmarried surviving spouse — can receive a significant reduction in their taxable home value. Additional benefits may be available for those with low income.
- A $5,000 reduction in the assessed home value is available for veterans with a minimum disability rating of 10 percent
- Veterans with total and permanent service-related disabilities may qualify for a full property tax exemption. A similar exemption is available to veterans who use wheelchairs and receive VA specially adapted housing assistance for specially adapted housing
- Veterans age 65 or older who were honorably discharged and have a combat-related, service-connected disability may be eligible for a property tax discount. The discount matches the veteran’s VA disability rating and applies to their home. If the veteran dies, the surviving spouse can continue the discount as long as they remain unmarried.
- Veterans may qualify for a $6,000 state income tax exemption. Spouses or civil union parters filing a joing return with a qualifying veteran may also be eligible.
- Honorably discharged veterans may qualify for a $250 property tax deduction. Surviving spouses and domestic partners may also be eligible.
- The property tax exemption for veterans recently rose from $4,000 to $10,000, with future increases planned to account for inflation.
- Historically, New Mexico has provided a 100% property tax exemption for veterans with a 100% permanent and total service‑connected disability. Starting with the 2026 tax year, disabled veterans will also be eligible for a partial property tax exemption based on their VA disability rating. For example, a veteran with a 60% disability rating will receive a 60% exemption, rather than needing a full disability rating to qualify.
- Three property tax exemptions offer full or partial tax breaks, depending on when a veteran’s home was purchased and their date of service.
- A complete property tax exemption will be available to veterans with a 100 percent service-connected disability when they file their 2026 taxes in 2027.
— Source: CPA and tax expert Lisa Greene-Lewis, TurboTax
Fast facts on state taxes:
- States typically offer tax benefits only to those honorably discharged or released from active duty under honorable circumstances.
- Property tax relief is usually tied to a home’s value and whether it’soften applies only to a primary primary residence.
- Surviving spouses often qualify for continued relief.
- Many states offer extra tax breaks for disabled veterans. Check your state’s revenue website for details on available benefits and how to apply.
AARP Foundation Tax-Aide
The AARP Foundation Tax-Aide program is the nation’s largest free, volunteer-based tax assistance service. It focuses on people 50 and older as well as those with low to moderate incomes, but Tax‑Aide is open to anyone, free of charge, and no AARP membership is required.
Learn more and find a location near you.
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