What's tax-free and what isn't
| Payment | Federal income tax |
|---|---|
| VA disability compensation, including back pay and dependent amounts | Not taxable |
| VA pension for disability, paid to veterans or their families | Not taxable |
| Combat-related special compensation (CRSC) | Not taxable |
| Military retired pay based on years of service, including the part restored by concurrent retirement and disability pay (CRDP) | Taxable |
| The part of military retired pay you give up to receive VA compensation | Nothing to tax: you receive it as VA compensation instead |
| Lump-sum disability severance pay, if you're later awarded VA disability benefits | Not taxable |
| Non-disability separation pay | Taxable, even if VA later gives you a retroactive rating |
Source: IRS Publication 525 (2025), sections "Veterans' benefits" and "Military and Government Disability Pensions". The IRS lists these VA payments, among others, as not taxable: education, training and subsistence allowances; disability compensation and pension payments for disabilities paid to veterans or their families; grants for homes designed for wheelchair living; and grants for motor vehicles for veterans who lost their sight or the use of their limbs.
Where does it go on my tax return?
Because it isn't income for federal tax purposes, you don't add VA disability compensation anywhere on Form 1040. If you also get military retired pay, retired pay based on years of service is taxable as usual, while some disability retired pay can be partly excluded (IRS Publication 525). DFAS, which pays military retirees, says CRDP is taxed in the same manner as retired pay, and pays CRSC separately because it isn't taxable.
Got a retroactive rating? You may be owed a tax refund
The IRS says that if you retired from the military based on years of service and VA later gives you a disability rating that reaches back in time, your retired pay for that earlier period is excluded from income, up to the VA compensation you would have received. You can claim a refund of the tax you paid on that amount by filing an amended return, Form 1040-X, for each year, with a copy of the VA determination letter.
The usual deadline to claim a refund is 3 years from when you filed the return, but after a retroactive VA determination the IRS allows one extra year from the date of the determination. That extra year doesn't reach a tax year that began more than 5 years before the determination.
This is a tax question for the IRS, not a VA claim question. For help with a tax return, see the IRS's free tax return help for people who qualify, or a tax professional.
State income tax
The federal law says VA benefits "shall be exempt from taxation" (38 U.S.C. 5301), without limiting that to federal tax. Below, we list only states whose own tax office or veterans agency says so in writing, with their words and a link. If your state isn't listed, that only means we haven't found such a statement yet.
| State | What the state says |
|---|---|
| Alabama | Its list of income exempt from Alabama income tax includes "Disability retirement payments (and other benefits) paid by the Veterans Administration." (Alabama Department of Revenue) |
| Arkansas | "Social Security benefits, VA benefits, Workers' Compensation, Railroad Retirement benefits and related supplemental benefits are exempt from tax." (2025 AR1000F instructions) |
| California | "VA disability benefits and 'lump-sum' retroactive payments are: Tax-exempt; Not included in income; Not reported on IRS Form 1099-R." (Franchise Tax Board) |
| Mississippi | "Mississippi does not tax benefits received from U.S. Social Security, Railroad Retirement Public Welfare assistance, Veterans' Administration payments or workers' compensation." (Department of Revenue FAQ) |
| New Jersey | Its list of income New Jersey doesn't tax includes "Permanent and total disability, including VA benefits." (NJ Division of Taxation) Its military guide says: "New Jersey does not tax total and permanent disability income if you are considered disabled under the federal Social Security Act," and that to qualify "you must be receiving" a military disability pension or "U.S. Department of Veterans Affairs Disability Compensation." (GIT-7) New Jersey ties its wording to total and permanent disability. |
| Wisconsin | The Department of Revenue says certain military and government disability pensions aren't taxable for federal purposes and "Wisconsin follows the federal treatment of these disability pensions." (Publication 128) It doesn't name VA compensation separately. Wisconsin's return starts from federal adjusted gross income (2025 Form 1, line 1, from Form 1040 line 11), and VA disability compensation isn't part of that. (2025 Form 1 instructions) |
Many other states start their income tax return from a federal figure that VA disability compensation is never part of. The 2025 instructions for Hawaii, Illinois, Nebraska, New Mexico, New York, Ohio, Oklahoma, Wisconsin and the District of Columbia start from your federal adjusted gross income, and Colorado and South Carolina start from federal taxable income. Check your state's instructions for any additions.
Nine states don't tax wages: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington and Wyoming. Our sister site has the details and sources: states with no income tax.
Military retired pay is a different question: many states tax it, and some exempt it. Don't assume a state's rule for retired pay applies to VA compensation, or the other way around.
Questions people ask
Is VA disability income taxable?
Not for federal income tax. Federal law exempts VA benefits from taxation (38 U.S.C. 5301), and IRS Publication 525 lists disability compensation and pension payments for disabilities, paid to veterans or their families, as not taxable.
Do I report VA disability on my tax return?
No. The IRS says not to include veterans' benefits paid under laws VA administers in your income, so VA disability compensation doesn't go on your federal return.
Is VA disability back pay taxable?
No. Back pay is VA disability compensation paid for earlier months, and VA disability compensation isn't subject to federal income tax.
Is VA disability taxable by my state?
The federal law that exempts VA benefits from taxation isn't limited to federal tax. Alabama, Arkansas, California and Mississippi say in their own guidance that they don't tax VA benefits. New Jersey excludes "permanent and total disability, including VA benefits," and Wisconsin follows the federal treatment of disability pensions. Nine states have no income tax on wages at all. See the state table on this page.
Is CRDP taxable? Is CRSC taxable?
CRDP is restored military retired pay, so it is taxed like other retired pay. CRSC is different: the IRS says you may exclude combat-related special compensation from your income.
Does VA disability count as income for the earned income credit?
No. IRS Publication 596 lists veterans' benefits among the payments you don't include in earned income for the earned income credit.
Updated November 7, 2026. Sources: 38 U.S.C. 5301; IRS Publication 525 (2025), "Veterans' benefits", "Military and Government Disability Pensions", "Retroactive VA determination", "Special statute of limitations" and "Combat-related special compensation"; IRS Publication 596 (earned income); DFAS "CRDP and CRSC FAQs". State sources are linked in the state table (checked November 7, 2026). Not affiliated with the U.S. Department of Veterans Affairs or the IRS.