Benefits paid to disabled veterans are generally tax-free.
Among the 50 states, there’s a broad range of tax benefits and preferences for disabled veterans. Most mirror the federal tax benefits associated with disability compensation and other benefits. Some states offer reduced property taxes or eliminate them altogether, while others exempt disabled veterans from sales taxes. Of the states that collect income taxes from their residents, some offer special considerations for disabled veterans. In addition, there’s a wide array of reduced or eliminated taxes and fees available to disabled veterans for other state-sponsored programs and activities.
Disability and Other Federal Payments
Veterans who are disabled by diseases or injuries sustained during active duty or training are eligible for monthly compensation payments from the U.S. Department of Veterans’ Affairs. The VA bases these payments on the severity of the disability and the veteran’s family size, which can include children, a
spouse and one or two parents. Dependency and indemnity compensation is a payment made to the surviving spouse, children, or parents of a service member who died on active duty or because of service-related disabilities. Special monthly compensation is an additional payment made to veterans, their spouses and their parents, in recognition of special circumstances such as the loss of a limb. All of these benefits are free of federal taxation and, in most states, from state income taxes as well.
Except for Delaware, Missouri and Rhode Island, each state offers some sort of property tax reduction for disabled veterans. In 22 states, the disability must be 100 percent, with the others varying the benefit based on the degree of disability. Some states also set limits on the assessed value eligible for the exemption, and others impose an income cap beyond which disabled veterans lose their eligibility.
Income Taxes and Sales Taxes