Veterans and Tax Benefits: Maximizing Deductions and Credits

For veterans, navigating the tax system can be challenging, but there are numerous tax benefits, credits, and deductions designed to ease the financial burden for those who have served in the military. By understanding and leveraging these tax breaks, veterans can significantly reduce their tax liability and maximize their refunds. From federal tax credits to state-specific exemptions, there are many opportunities for veterans to benefit during tax season.

In this blog, we will provide veterans with an overview of the tax benefits they may be eligible for, including important tax credits and deductions, as well as state-specific veteran tax exemptions. Additionally, we will explore how Warrior Allegiance can assist veterans in understanding and applying for these benefits.

1. Understanding Tax Benefits for Veterans

Veterans have access to a variety of tax benefits at both the federal and state levels. These benefits are designed to recognize and reward military service, as well as assist veterans who may be facing financial challenges due to their service-connected disabilities, retirement, or other factors.

The following are some of the key federal tax benefits available to veterans:

Disability Benefits Exclusion

For veterans receiving disability compensation from the Department of Veterans Affairs (VA), this income is tax-free. This means that VA disability payments are not subject to federal income tax, and veterans do not need to include them when calculating their taxable income. Additionally, retroactive disability compensation received due to a VA claim appeal is also tax-exempt.

• Action Step: Veterans receiving disability benefits should ensure these payments are not included in their taxable income when filing their taxes.

Military Retirement Pay

Veterans who receive military retirement pay may be eligible for certain tax benefits depending on their service and state of residence. In many states, military retirement pay is partially or fully exempt from state income taxes. Additionally, retired veterans with service-connected disabilities may be able to exclude a portion of their retirement pay from federal taxes.

• Action Step: Check whether your state offers tax exemptions on military retirement pay, and consult with a tax advisor to determine how much of your retirement pay may be excluded from federal taxes.

Combat Pay Exclusion

If you served in a combat zone, you may be eligible for the combat pay exclusion, which allows you to exclude any compensation earned in a designated combat zone from your taxable income. This applies to active-duty members, but veterans who recently retired from the military may also benefit if they served in a combat zone during their final months of service.

• Action Step: Veterans who recently separated from the military should review their service record to determine if any combat pay can be excluded from their taxable income.

2. Tax Deductions and Credits for Veterans

In addition to tax exemptions on certain types of income, veterans may also qualify for various tax deductions and credits that can help lower their tax liability. Here are some of the most important ones to consider.

Earned Income Tax Credit (EITC)

Veterans with low to moderate income may qualify for the Earned Income Tax Credit (EITC), a federal tax credit that can reduce the amount of tax owed or increase a tax refund. The amount of the credit is based on the veteran’s income, filing status, and the number of qualifying children.

Even veterans who are disabled or retired may still be eligible for the EITC if they meet the income requirements. For 2023, the maximum credit ranges from $560 to $6,935, depending on the number of qualifying children.

• Action Step: Use the IRS’s EITC Assistant tool to determine if you qualify for the credit and how much you could claim based on your income and family situation.

VA Mortgage Interest Deduction

Veterans who own a home with a VA-backed mortgage can benefit from the same tax deductions available to all homeowners, including the mortgage interest deduction. This allows veterans to deduct the interest they pay on their mortgage loan from their taxable income, which can lower their overall tax bill.

• Action Step: Make sure to gather your Form 1098 (Mortgage Interest Statement) from your lender, which will show the amount of interest paid during the tax year.

Work Opportunity Tax Credit (WOTC) for Veterans

The Work Opportunity Tax Credit (WOTC) is a federal tax credit available to employers who hire veterans, especially those with disabilities or those who have faced long-term unemployment. While this is a benefit for employers, veterans should be aware of it because it makes them more attractive job candidates. Employers can claim a tax credit of up to $9,600 for each veteran they hire.

• Action Step: When applying for jobs, mention to potential employers that they could qualify for the WOTC if they hire you, which can enhance your job prospects.

3. State-Specific Veteran Tax Exemptions

In addition to federal tax benefits, many states offer state-specific tax exemptions and credits for veterans. These can include property tax exemptions, state income tax exclusions for military retirement pay, and other state-level credits for veterans with disabilities.

Here are a few examples of state-specific tax benefits for veterans:

• Property Tax Exemptions: Many states offer property tax exemptions for disabled veterans or veterans over a certain age. For example, in Texas, veterans with a 100% service-connected disability rating are fully exempt from paying property taxes on their primary residence.
• State Income Tax Exemptions for Retirement Pay: States like Florida, Alabama, and Nevada do not tax military retirement pay at all, making them attractive places for veterans to retire.
• Vehicle Registration Discounts: Some states, such as California and Virginia, offer discounts or fee waivers for vehicle registration to veterans with disabilities or those who received certain military honors.
• Action Step: Research the specific tax benefits available in your state for veterans by visiting your state’s Department of Veterans Affairs website or contacting a local veterans’ service office.

4. How to Apply for Veteran Tax Benefits

To take full advantage of these tax benefits, veterans need to ensure they are properly claiming all eligible exemptions, deductions, and credits when filing their taxes. Here’s how to get started:

Gather Supporting Documentation

Make sure to gather all necessary documentation, including:

• DD Form 214 to verify military service.
• VA Disability Rating Letter for veterans claiming disability benefits or property tax exemptions.
• Form 1098 for mortgage interest deductions.
• Proof of income for credits like the EITC.

File Electronically for Faster Refunds

Filing your taxes electronically with the IRS Free File program or using tax preparation software can help veterans quickly identify deductions and credits they may be eligible for. It also speeds up the refund process, allowing veterans to receive their refunds faster.

Consult a Tax Professional

While many tax benefits are easy to claim, others may require guidance. Veterans should consider working with a tax professional or Veterans Service Officer (VSO) who can provide expert advice and help ensure all eligible tax benefits are claimed. Some organizations, such as Volunteer Income Tax Assistance (VITA), offer free tax preparation services for veterans.

• Action Step: Reach out to local veteran organizations, tax professionals, or free tax clinics to get assistance with filing your taxes and maximizing your benefits.

5. How Warrior Allegiance Supports Veterans with Tax Benefits

Warrior Allegiance is committed to helping veterans access the financial benefits and resources they deserve. The organization offers:

• Guidance on Tax Benefits: Warrior Allegiance helps veterans understand the various tax credits, deductions, and exemptions available to them at both the federal and state levels.
• Tax Preparation Assistance: The organization can connect veterans with free or low-cost tax preparation services and tax professionals who are familiar with veteran-specific tax issues.
• Ongoing Support: In addition to tax assistance, Warrior Allegiance provides veterans with resources related to employment, housing, and financial planning, helping them build long-term financial stability.

Conclusion

For veterans, taking full advantage of the available tax benefits can make a significant difference during tax season. Whether through federal tax credits, deductions, or state-specific exemptions, veterans can reduce their tax liability and increase their refunds.

With the help of organizations like Warrior Allegiance, veterans can access the guidance and support they need to navigate the tax system and ensure they are maximizing their benefits. If you’re a veteran, take the time to explore the tax benefits you may be eligible for and make sure you’re fully prepared for the next tax season.