How Veteran Status Affects Your Tax Debt

Staff Writer
December 02, 2018
How Veteran Status Affects Your Tax Debt

If you are a veteran and you owe taxes you cannot afford to pay, you may be eligible for IRS relief programs. Veterans also receive special consideration in certain other tax matters. The IRS defines a veteran as an individual who has served at least 24 consecutive months in active duty and has not received a dishonorable discharge. This includes full-time members of the Army, Navy, Marines, Air Force, and Coast Guard as well as commissioned officers of certain federal agencies. Spouses, children, and parents of deceased and disabled veterans also qualify. 

Tax-Exempt Disability Benefits

Your taxable gross income does not include your VA disability benefits. This includes: 

  • Pension and disability compensation payments, including those paid to your family. 
  • Grants to build or modify wheelchair-accessible homes. 
  • Grants for specialized motor vehicles for blind or paralyzed veterans. 
  • Dependent-care assistance benefits. 

Spouse and dependent benefits are also free from income tax. These benefits include the one-time death gratuity payment for the families of deceased service members, survivor’s pensions, and Dependency and Indemnity Compensation payments. 

Some veterans are employed through the Compensated Work Therapy (CWT) program, which provides vocational rehabilitation services to individuals with histories of homelessness, substance abuse, and mental illness. Wages for CWT employment are not taxed. 

Retirement Pay

Veterans who have served for at least 20 years may be eligible for retirement pay. Although retirement pay is taxable as income, a percentage may be considered tax exempt. This includes: 

  • Payments to the Survivors Benefit Plan (SBP). 
  • Disability-related retirement pay and benefits. 
  • Disability-related pensions and annuities for those who were injured in combat or served before September 1975. 

Federal Tax Refund For Disabled Veterans

If your disability percentage has been increased by the Department of Veteran Affairs (VA) or if you have been accepted for Combat-Related Special Compensation after retiring as a disabled veteran, you might qualify for a federal tax refund. 

To determine eligibility, you must file IRS Form 1040X to amend the return for the year in which disability percentage was initially determined or reassessed. This form must be filed on paper and include copies of all VA documents and paperwork from Defense Finance and Accounting Services. The latter department will issue a 1099-R for the taxable portion of your compensation. 

A certified public accountant (CPA) can help you determine whether you qualify for the refund. If you claim the refund and are ineligible to do so, you may be subject to penalties and interest.  

Free Tax Preparation Services

Since 2015, the IRS has agreed to provide free tax preparation services for veterans and their families. These services are provided by volunteers who are certified by the IRS and are available at eight sites throughout the nation. Free electronic filing is available through this Volunteer Income Tax Assistance (VITA) program. Veterans older than age 60 can also obtain free tax preparation through AARP Tax-Aide and/or Tax Counseling for the Elderly. 

Free Financial Coaching

Veterans can access free financial planning support through the Financial Coaching Initiative offered by the Consumer Financial Protection Bureau. These services include certified financial coaches who meet with veterans at Armed Forces Services Corporation locations throughout the U.S. You can find a coach near you online or call 1-844-90-GOALS.  

Earned Income Tax Credit

About 2 million veteran families qualify for the Earned Income Tax Credit (EITC), which supports taxpayers of low to moderate income. This tax break is designed to help these families build an emergency savings account and access long-term financial stability. Many veteran families also qualify to receive the Child Tax Credit. 

Combat-Injured Veterans Tax Fairness Act of 2016

This federal law creates tax-exempt status for the one-time lump sum disability severance payment that disabled veterans who were injured in combat receive from the Department of Defense. This agency will identify affected veterans so they can file an amended return to take advantage of this exemption. 

Property Tax Exemption

Some states allow veterans to deduct the cost of their property tax in certain circumstances. This guide provides information about property tax veteran benefits by state. 

Managing Tax Debt

Veterans who are struggling to pay their taxes should first make sure they have taken full advantage of the credits described above. If you’re not sure, an expert from the VITA program can help you review your past returns and see if they need to be amended. This may reduce the amount of past-due tax assessed. Next, take the steps below to get on the road to paying back your tax debt. 

  • Make sure you have filed all late tax returns. The failure-to-file penalty is 5% of your past-due assessed balance every month until you follow. In contrast, the failure-to-pay penalty is just 0.5% of your total past-due balance. 
  • Deal with accumulating debt as soon as possible to avoid losing your security clearance if you are active duty. Being in debt is often included as an example of “unbecoming behavior” under Uniform Code of Military Justice Article 134.  
  • Seek assistance from a nonprofit credit counseling service. These professionals will gather information about your debt and recommend potential solutions. For IRS debt, this could mean negotiating an offer in compromise, in which you settle the debt for less than you owe, or establishing a payment plan. These agencies charge only a small fee for services such as negotiating with your creditors and consolidating your debt. 
  • If you have good credit, you may be able to access a low-interest-rate loan to pay off your debt. Look for programs that offer unsecured loans for veterans. You should also consult with your bank and credit union. 
  • Keep looking for new programs that benefit veterans. For example, President Donald Trump recently announced his intention to forgive student loans for eligible disabled veterans. Take advantage of resources in your state.  

Individuals concerned about their ability to pay off their debt can answer a few basic questions on Solvable. Credit card debt, student loan debt, and tax debt relief programs are available. We’ll match you with vetted companies who specialize in creating financial solutions. 

 

Need help with your Tax Debt Relief?
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