Veterans Tax Breaks: What Is Tax-Free, What Is Not, and Where to File for Free
Six things veterans ask about at tax time. Each section names its official source and links to it. We list only what an official page confirms.
Federal figures come from the 2025 editions of IRS Publications 3, 525 and 596, the versions current when we checked. Rules and dollar limits change each year, so check the current publication before you file.
VA disability compensation is tax-free
IRS Publication 525 says: “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).” Disability compensation and pension payments for disabilities, paid to veterans or their families, are on its list of amounts that are not taxable. So are education, training and subsistence allowances and veterans’ insurance proceeds and dividends.
Two related rules from the same publication: combat-related special compensation is excluded from income, and if you retired on years of service and the VA later gives you a retroactive service-connected disability rating, the retirement pay for the retroactive period is excluded up to the VA benefit you would have received. You claim any refund on Form 1040-X, attaching the VA determination letter.
Source: IRS Publication 525, Taxable and Nontaxable Income (2025), Military and Veterans’ benefits. For payment amounts, see the VA current disability compensation rates.
State property-tax exemptions for disabled veterans
These are set by each state, not the IRS, and they differ a lot. The table lists only states whose own tax agency page we read on October 20, 2026. Always confirm the current rules and the application deadline with your county assessor.
| State | What the agency page confirms | Agency page |
|---|---|---|
| Texas | The Comptroller says Texas offers a disabled veteran exemption that can cover part or all of a property’s value, based on the disability rating. A veteran with 100 percent VA disability compensation, or a 100 percent rating of individual unemployability, gets a total exemption on the residence homestead (Tax Code 11.131). Tax Code 11.22 gives a partial exemption on one property that varies with the rating. | Texas Comptroller: property tax exemptions |
| Florida | The Department of Revenue says benefits are available to property owners who are veterans or active-duty service members, and offers the guide “Property Tax Benefits for Active Duty Military and Veterans (PT-109).” | Florida Department of Revenue: exemptions |
| Michigan | The Department of Treasury lists a “Disabled Veteran Exemption” among its property tax exemption programs. | Michigan Treasury: property tax exemption programs |
| California | The Board of Equalization describes a general Veterans’ Exemption of up to $4,000 of property value for qualified veterans who own limited property ($5,000 in total property if single, $10,000 if married). This is the general veterans’ exemption, not a disability-based one. | California BOE: Veterans’ Exemption |
MilTax free filing
For a veteran the practical question is how long the free help lasts. Military OneSource describes MilTax as free tax software plus expert consultations, and it extends the offer to recent veterans for up to 365 days after their separation or retirement date, with eligibility checked through the Defense Enrollment Eligibility Reporting System (DEERS). The window runs from your own separation date rather than from a calendar year: someone who separated on March 1 is counted 365 days from that date. IRS Publication 596 also points qualified veterans to MilTax.
When we checked, the Military OneSource page said the MilTax software “will be available in January 2027.” Use the page for the current status and phone number.
Source: Military OneSource, MilTax: Free Software & Support; IRS Publication 596 (2025).
Combat-zone pay after you leave service
If you served in a designated combat zone, the exclusion in IRS Publication 3 can still matter once you are a veteran. Pay you receive after leaving the zone, even in a later year, is covered when it is for a month you served there or were hospitalized because of wounds, disease or injury incurred there. Excluded pay should not be in box 1 of your Form W-2; the excluded amount is reported in box 12 with code Q. If a past W-2 shows pay in box 1 that you believe should have been excluded, our guide to amending past returns explains the route.
The exclusion does not reach retirement pay or pensions, which is why a retired veteran still reports those amounts as described in the next section. The officer monthly cap, the list of designated zones and state bonus payments are covered in the Active Duty hub and in our combat zone exclusion guide.
Source: IRS Publication 3, Armed Forces’ Tax Guide (2025), Combat Zone Exclusion.
Military retirement pay
IRS Publication 525 says payments you receive as a member of a military service are generally taxed as wages, except retirement pay, which is taxed as a pension. If the retirement pay is based on age or length of service, it is taxable and goes on lines 5a and 5b of Form 1040 or 1040-SR. The amount of any reduction in retired pay to provide a survivor annuity under the Survivor Benefit Plan or the Retired Serviceman’s Family Protection Plan is not included in income. If you retired on disability, Publication 525 sends you to its section on military and government disability pensions.
Source: IRS Publication 525 (2025), Military retirement pay; IRS Publication 3 (2025).
VA benefits, combat pay and the Earned Income Tax Credit
Two separate rules in IRS Publication 596 affect veterans. First, veterans’ benefits, including VA rehabilitation payments, are not earned income, so they do not count toward the credit. Nontaxable allowances such as the Basic Allowance for Housing and the Basic Allowance for Subsistence are not earned income either. A household living mainly on VA benefits should not expect those payments to create an Earned Income Tax Credit.
Second, if you still had nontaxable combat pay in the tax year, you may choose to count it as earned income. The choice covers all of that pay or none of it, each spouse decides separately on a joint return, and the amount comes from box 12 of the W-2 with code Q onto Form 1040 line 1i. Because counting it can raise or lower the credit, work the return both ways before you decide. The 2025 earned-income thresholds are listed in the Active Duty hub.
Source: IRS Publication 596, Earned Income Credit (2025); IRS Publication 3 (2025), Earned Income Credit; IRS: special EITC rules for military.
Short answers
Is VA disability compensation taxable?
No. IRS Publication 525 says not to include in income any veterans' benefits paid under any law administered by the Department of Veterans Affairs, and lists disability compensation and pension payments for disabilities among the amounts that are not taxable.
Is military retirement pay taxable?
Retirement pay based on age or length of service is taxable as a pension, according to IRS Publication 525. It is entered on lines 5a and 5b of Form 1040 or 1040-SR. Combat-related special compensation is excluded from income.
Who can use MilTax for free?
Military OneSource says MilTax software and expert consultations are free for active-duty service members, eligible family members, survivors and recent veterans up to 365 days from their separation or retirement date. Eligibility is verified through DEERS.
Does combat pay count toward the Earned Income Tax Credit?
Only if you choose it. IRS Publication 3 says you can elect to include nontaxable combat zone pay in earned income for the EIC. It is all or none, and it can increase or decrease the credit, so figure the credit both ways first.
Sources
- IRS Publication 3, Armed Forces’ Tax Guide (2025)
- IRS Publication 525, Taxable and Nontaxable Income (2025)
- IRS Publication 596, Earned Income Credit (2025)
- IRS special EITC rules
- VA current disability compensation rates
- Military OneSource: MilTax
- Texas Comptroller
- Florida Department of Revenue
- Michigan Department of Treasury
- California Board of Equalization
All sources were read on October 20, 2026. See also our sources and editorial policy.