VA Disability Compensation and Taxes: What Is Tax-Free and What Is Not

By SSgt Christian Horton

Page updated: October 21, 2026 · Official guidance last changed: April 30, 2026

VA disability compensation is not taxable income, and the same IRS text lists a group of other VA payments that are also tax-free. This guide covers that list, the 2026 monthly VA rates for ratings of 10 to 100 percent, veteran alone, how military disability severance and retroactive VA rating decisions are handled, the refund claim that follows a retroactive decision, and what the IRS text says about combat-related items. The tax year context is the 2025 return filed in 2026.

The rule: VA benefits are not income

IRS Publication 525 states the rule in one sentence: do not include in your income any veterans' benefits paid under any law, regulation, or administrative practice administered by the Department of Veterans Affairs (VA). The same passage then lists amounts paid to veterans or their families that are not taxable. Among them: "Disability compensation and pension payments for disabilities paid either to veterans or their families."

Other tax-free VA benefits in Publication 525

Publication 525 lists the following as not taxable. Education, training and subsistence allowances and benefits under a dependent-care assistance program are also on the list. The table covers the other items, in the order the publication gives them.

A state combat-zone bonus included in income in an earlier year can be claimed back on Form 1040-X, one form per tax year, generally within 3 years after the original return was filed or 2 years after the tax was paid, whichever is later.

2026 VA monthly rates, veteran alone

The VA publishes its rates by disability rating and by the number of dependent family members. The VA page for 2026 rates says the rates are effective December 1, 2025. For a veteran with a 10 or 20 percent rating, the VA notes that the rate does not rise even with a dependent spouse, child or parent. For ratings of 30 percent and above, the rate depends on dependent status. The table shows only the "Veteran alone (no dependents)" row; the dependent rows are on the VA page linked in Sources.

The cost-of-living adjustment

The VA rates page answers the COLA question directly: "Yes. We're required by law to match the percentage of cost-of-living adjustments (CLOA) made to Social Security benefits." The VA points to the Social Security Administration website for the latest COLA information. The VA rates overview page was last updated September 22, 2026, and the rate table page was last updated December 2, 2025. The exact percentage is published by the VA and the Social Security Administration.

Military disability pay from the Defense side

Publication 525 has a separate section for military and government disability pensions. A pension, annuity or similar allowance for personal injury or sickness from active service in the armed forces of any country, NOAA, the Public Health Service or the Foreign Service may be excludable. The publication gives these conditions, and the payments are not included in income if any one applies:

• The member was entitled to receive a disability payment before September 25, 1975.
• The member was in a listed service or its reserve component, or under a binding written commitment to join, on September 24, 1975.
• The payments are for a combat-related injury.
• The member would be entitled to VA disability compensation if an application were filed. The exclusion under this condition equals the amount the VA would pay.

A combat-related injury, as Publication 525 defines it, is a personal injury or sickness that results directly from armed conflict, takes place while engaged in extra-hazardous service, takes place under conditions simulating war (including training exercises such as maneuvers), or is caused by an instrumentality of war.

A disability pension based on years of service must in most cases be included in income. If it qualifies for the exclusion, the part that would have been paid on a percentage-of-disability basis is left out and the rest is included.

Severance pay and retirement pay versus VA compensation

Publication 525 treats these three situations differently. The table sorts them.

Retroactive VA decisions and refund claims

When a retiree who retired on years of service is later given a retroactive service-connected rating, Publication 525 says the retirement pay for the retroactive period is excluded from income up to the amount of VA disability benefits the retiree would have been entitled to receive. Tax paid on the excludable amount can be claimed back, subject to the statute of limitations, by filing an amended return on Form 1040-X for each previous year in the retroactive period. Each Form 1040-X must include a copy of the official VA determination letter granting the retroactive benefit, and the letter must show the amount withheld and the effective date.

The VA determination letter generally has a table with five headings covering the same dates as the tax year on the Form 1040-X. The tax reduction is the effective months multiplied by the amount withheld for that tax year, and the result is entered as a reduction on Form 1040-X, line 1, Adjusted gross income, column B.

Timing: the special statute of limitations and Example 19

In most cases a claim for credit or refund must be filed within 3 years from the time the return was filed. For a retroactive service-connected disability rating, Publication 525 extends the statute of limitations by a 1-year period beginning on the date of the determination. The extension applies to claims filed after June 17, 2008, and does not apply to any tax year that began more than 5 years before the date of the determination.

Example 19 in Publication 525 shows the effect. A retiree who retired in 2019 on a years-of-service pension receives, on August 3, 2025, a determination of service-connected disability retroactive to 2019. The publication says refunds could generally be claimed for 2022, 2023 and 2024. Under the special period, a claim for 2021 is also possible if filed by August 3, 2026. That date has passed; the example illustrates the IRS rule and does not describe an open filing window. Claims for 2019 and 2020 cannot be filed because those tax years began more than 5 years before the determination.

Worked example: the Form 1040-X arithmetic

The first calculation below is the one Publication 525 itself uses, with 2022 as the tax year. The second uses an invented veteran, Veteran Q, to show the same method with a constant amount for all 12 months. If the amount changed during the year, each period is multiplied separately. Veteran Q and the numbers for Veteran Q are invented, for illustration only.

Combat-related items

Publication 525 says combat-related special compensation (CRSC), described under 10 U.S.C. section 1413a, is a specific entitlement payable only to retirees of the uniformed services. If CRSC is received, its amount may be excluded from income, and other portions of military or disability retirement pay may still be included. Publication 3 repeats the point in a tip: CRSC is a benefit awarded to certain retired veterans with combat-related disabilities, and it is excluded from income.

Publication 3 also says retirement pay and pensions do not qualify for the combat zone exclusion. The guide on military retired pay and SBP taxes covers CRDP and CRSC detail for retirees.

Publication 525 also states that disability payments for injuries resulting directly from a terrorist or military action are not included in income. Amounts that would have been received in retirement regardless of the disability must still be included. Publication 525 defines a military action as one that does not include training exercises, unlike the combat-related injury definition above, which does include them.

Publication 525 adds a tip for these terrorist or military action payments: if the payer incorrectly reports them as taxable on Form W-2 or Form 1099-R, the payer can be asked to reissue the form showing them as nontaxable, in box 12 under code J of Form W-2 or in box 1 but not box 2a of Form 1099-R. If income tax is being wrongly withheld, Form W-4 (for payments on Form W-2) or Form W-4P (for payments on Form 1099-R) can be submitted to stop the withholding.

Limits of this guide

• The rate table shows the veteran-alone row only; rows for a spouse, children and parents are on the VA rates page.
• The guide covers federal income tax. State treatment of VA benefits varies; the state tax agency answers that question.
• The VA reduces compensation by the amount of some military retirement, severance and separation pay. This guide does not explain those offsets.
• Rates reflect the VA rate table page updated December 2, 2025 (overview page updated September 22, 2026), and the IRS text reflects the 2025 editions of Publications 525 and 3; later changes are not covered.

A short checklist

• Check whether the payment is administered by the VA, which Publication 525 says is not included in income.
• Sort any lump sum on leaving service as disability severance or as readjustment or other nondisability severance, since Publication 525 treats them differently.
• For a retroactive rating, note the determination date, from which the 1-year extension and 5-year limit are measured.
• File a separate Form 1040-X for each affected tax year, with a copy of the VA determination letter attached.

Sources

• IRS Publication 525, Taxable and Nontaxable Income (2025): Veterans' benefits, Military and Government Disability Pensions, Example 19
• IRS Publication 3, Armed Forces' Tax Guide: Combat zone exclusion and CRSC tip
• VA, 2026 veteran disability compensation rates (effective December 1, 2025)
• VA, disability compensation rates and cost-of-living adjustments

Related guides

• Taxable vs tax-free military pay
• Amending past returns
• Combat zone exclusion for reservists
• Other tax breaks

See the Veterans hub →