Is VA Disability Taxable?

38 U.S.C. 5301(a)(1) says that “such payments made to, or on account of, a beneficiary shall be exempt from taxation”. The payments it covers are “Payments of benefits due or to become due under any law administered by the Secretary” of Veterans Affairs.

The IRS says the same in Publication 525: “Don’t include in your income any veterans’ benefits paid under any law, regulation, or administrative practice administered by the Department of Veterans Affairs (VA).” Its list of amounts that are not taxable includes “Disability compensation and pension payments for disabilities paid either to veterans or their families.” Because it is not included in income, you do not report VA disability compensation as income on your return.

The statute has a limit: “nor shall the exemption therein contained as to taxation extend to any property purchased in part or wholly out of such payments.” This page does not apply that limit to any particular purchase or account; ask a tax professional about those.

VA back pay for a retroactive award is VA disability compensation, so the federal exemption above applies to it. The refund question comes up when you are a military retiree whose retired pay was taxed for years before VA granted the rating. The IRS says: “If you retire from the U.S. Armed Forces based on years of service and are later given a retroactive service-connected disability rating by the VA, your retirement pay for the retroactive period is excluded from income up to the amount of VA disability benefits you would have been entitled to receive.”

How to claim it, in the IRS’s words: “You can claim a refund of any tax paid on the excludable amount (subject to the statute of limitations) by filing an amended return on Form 1040-X for each previous year during the retroactive period.” And: “You must include with each Form 1040-X a copy of the official VA determination letter granting the retroactive benefit. The letter must show the amount withheld and the effective date of the benefit.”

Time limits, as Publication 525 states them: “In most cases, under the statute of limitations, a claim for credit or refund must be filed within 3 years from the time a return was filed. However, if you receive a retroactive service-connected disability rating determination, the statute of limitations is extended by a 1-year period beginning on the date of the determination.” The IRS adds that the extended period “doesn’t apply to any tax year that began more than 5 years before the date of the determination.”

The example in the 2025 Publication 525, with the IRS’s own dates: “You retired in 2019 and receive a pension based on your years of service. On August 3, 2025, you receive a determination of service-connected disability retroactive to 2019. Generally, you could claim a refund for the taxes paid on your pension for 2022, 2023, and 2024. However, under the special limitation period, you can also file a claim for 2021 as long as you file the claim by August 3, 2026. You can’t file a claim for 2019 and 2020 because those tax years began more than 5 years before the determination.” Those dates are the IRS’s; count your deadlines from your own determination date.

Severance pay: “If you receive a lump-sum disability severance payment and are later awarded VA disability benefits, exclude 100% of the severance benefit from your income.” But “you must include in your income any lump-sum readjustment or other nondisability severance payment you received on release from active duty, even if you’re later given a retroactive disability rating by the VA.”

The VA waiver: DFAS says “The law requires that a military retiree waive a portion of their gross DoD retired pay, dollar for dollar, by the amount of their Department of Veterans Affairs (VA) disability compensation pay; this is known as the VA waiver (or VA offset).” DFAS’s own example shows what is taxed: “$1000.00 (Gross Retired Pay) Minus VA Pay ($450.00) = $550.00 (Net Retired Pay - taxable)”. The IRS treats retired pay based on length of service as taxable: “If your retirement pay is based on age or length of service, it’s taxable and must be included in your income as a pension”. The VA pay itself stays tax-free: “Regardless of your election, you will continue to receive your monthly disability payment from the VA, which is non-taxable.”

CRDP (Concurrent Retirement and Disability Pay) gives back retired pay that the waiver would have removed. DFAS: “CRDP decreases your VA waiver so that you receive more of your gross retired pay.” On tax: “It is taxed in the same manner as your retired pay, and it is normally considered taxable income.” So CRDP raises your taxable income; the VA compensation underneath it does not.

CRSC (Combat-Related Special Compensation) is different. DFAS: “It is non-taxable, and retirees must apply to their Branch of Service to receive it.” The IRS agrees in Publication 525: “If you’re in receipt of combat-related special compensation, you may exclude the amount of your combat-related special compensation from your income.” Publication 3 says “CRSC is excluded from income.” The IRS adds: “Other portions of your military or disability retirement pay may still be included in your income.”

If you retired under Chapter 61 (disability retirement), the rules differ. DFAS: “A military disability retiree with more than 20 years of creditable service for retirement must still waive retired pay in order to receive VA Disability Compensation.” Chapter 61 retirees with fewer than 20 years: DFAS says such a retiree “is not eligible to receive VA Disability Compensation and military disability retired pay concurrently.” See our CRDP page for the details. CRDP: eligibility and Chapter 61 rules

You cannot get both for the same money: “You may qualify for both types of payments, but you can only receive either CRDP or CRSC, not both.” Our CRDP and CRSC calculators show which one pays more before tax; the tax difference above is why the choice matters.

SSDI: SSA says “SSDI and VA disability compensations are not affected by each other, so you may be eligible to receive both.” It adds “However, you must apply for them separately.” In a publication for veterans rated 100% P&T, SSA also notes: “NOTE: Receiving Veterans Affairs compensation will not affect your Social Security benefits.”

A VA rating does not decide SSDI approval: “A Veterans Affairs compensation rating of 100% P&T doesn’t guarantee that you’ll receive Social Security disability benefits.” The same page says it may be possible to also be eligible for SSI, “depending on income and resources.”

SSI is different because it is based on income. SSA’s definition of income for SSI includes money from the Department of Veterans Affairs; SSA does not count all income, so ask SSA how your VA payment is treated. SSA also says “income that we do count reduces your SSI benefit amount.”

Tax on Social Security benefits: Publication 915 does not name VA benefits (we searched the 2025 edition). It compares your base amount with half of your benefits plus “All your other income, including tax-exempt interest.” and its worksheet line C asks for “Enter your total income that is taxable (excluding line A)”. Because Publication 525 says VA benefits are not included in income, it is a fair question whether they belong on that line, but the IRS does not say so in Publication 915, so check with a tax professional. Our Social Security taxability calculator takes the income you enter.

The sources on this page are federal. We have not checked any state’s rules, so this page does not say how any state taxes VA disability compensation or military retired pay.

To find out, look at your state department of revenue (or state tax agency) instructions for your state return, or ask a tax professional in your state.

Publication 525 lists these as not taxable: “Disability compensation and pension payments for disabilities paid either to veterans or their families.”, “Education, training, and subsistence allowances.”, “Veterans’ insurance proceeds and dividends paid either to veterans or their beneficiaries” and “The death gratuity paid to a survivor of a member of the U.S. Armed Forces who died after September 10, 2001.” In its scholarship section it adds “Allowances paid by the VA for education, training, or subsistence under any law administered by the Department of Veterans Affairs aren’t included in your income.”

The IRS list does not name dependency and indemnity compensation (DIC) or the GI Bill. 38 U.S.C. 5301(a)(3) does name “compensation, pension, or dependency and indemnity compensation” among the benefits the section covers; DIC is therefore a benefit under a law administered by the Secretary, which is what the 5301(a)(1) exemption (“Payments of benefits due or to become due under any law administered by the Secretary”) applies to. The IRS general rule likewise covers any veterans’ benefits paid under such laws. For a specific payment, check Publication 525 or a tax professional.