Veterans of the U.S. Armed Forces may receive compensation or pensions if they were not dishonorably discharged. The Internal Revenue Service, or IRS, requires people like veterans to pay taxes on income. Some types of compensation available to veterans is tax-free. Additionally, veterans' taxes may further decrease through tax credits and deductions.
Some veterans receive disability compensation if they are totally or partially disabled due to a service-related injury or illness. The amount of compensation veterans receive varies based on the level of disability and the number of dependents. Disability compensation is not taxed by the IRS. If this is the only compensation the veteran receives, he will not have to pay any taxes.
Non-disabled veterans may receive military retirement pay. The amount of retirement pay depends on the veteran's years of service and pay grade at the time of discharge. Military retirement payments are taxable by the IRS. Some veterans may receive disability compensation and retirement pay concurrently. In this case, tax applies only to the retirement pay.
Veterans may also receive additional compensation from Social Security benefits when they reach the retirement age of 67 for those born after 1960 and 66 for all others. Income from Social Security is only taxable if the veterans total income exceeds the income limit. As of 2010, single veterans who earn more than $25,000 and married veterans who earn more than $32,000 must file taxes with the IRS.
If the veteran receives military retirement pay while waiting for approval for disability compensation, he must file and pay taxes on the retirement pay. However, when the Department of Veteran Affairs issues an entitlement letter for disability compensation, the veteran may amend his taxes to reduce taxable income by the amount indicated by the entitlement letter. Like all U.S. tax payers, veterans may reduce taxable income with tax credits and deductions including the Earned Income Credit, first-time home buyer credit and deductions for medical expenses and education costs.