The short answer is no, these benefits are NOT taxable and should NOT be reported on your tax return as income. Just like VA health benefits, education benefits are connected to your service and not reported to the IRS. If you have done so in the past, you should have your returns amended for additional savings. You should receive a 1098-T showing what the VA paid for.
Excerpt from IRS Publication 970
“Payments you receive for education, training, or subsistence under any law administered by the Department of Veterans Affairs (VA) are tax free.”
To be clear, this means you do NOT claim GI Bill® benefits or other government funded education benefits as income. This also means you cannot take deductions or credits for expenses that are paid with grants or VA benefits.
If you are claiming credits on your tax return, you need to select what you are claiming- you cannot just claim all the benefits you are receiving. This is confusing, so we have provided the following example:
You are receiving two education benefits.
- $1,500 in monthly Basic Housing Allowance (BAH)
- $4,000 in GI Bill benefits
These benefits are NOT taxable. However, you’re looking to claim a Lifetime Learning Credit on your return and you paid $6,000 in qualified education expenses. The amount you can claim is $2,000. This is calculated as follows:
$6,000 – Qualified education expenses paid
$4,000 – GI Bill benefits received
$2,000 – Amount you can claim ($6,000 less $4,000 in benefits received)
Your Basic Allowance Housing (BAH) does not need to be subtracted because it is not a restricted benefit.
Other education benefits that may fall under this example:
- American Opportunity Credit
- Hope Credit
- Lifetime Learning Credit
- Student Loan Interest Deduction
- Student Loan Cancellations and Repayment Assistance
- Tuition and Fees Deduction
- Coverdell Education Savings Account (ESA)
- Qualified Tuition Program (QTP)
- Education Exception to Additional Tax on Early IRA Distributions
- Education Savings Bond Program
- Employer-Provided Educational Assistance
- Business Deduction for Work Related Education
The Veterans Administration website can provide additional information concerning these benefits.
Also, did you know that if you’re a member of the military, you can get free tax filing services, a service of the Department of Defense, has partnered with H&R Block to offer these free services.
FAQ: Is My 20 Year Retirement Check Taxable?
Most military retirement pay (or non-disability retired pay) is subject to withholding of federal income tax. Military retirement pay due to a service-connected injury typically is not. However, military retired pay is not subject to withholding for Social Security tax.
A couple of things to keep in mind: if you are receiving service-connected disability payments, this is SEPARATE from your retirement payments. If you are receiving civilian-related retirement payments, or if your partner is, this is in ADDITION to your military retirement pay. Often times when combined these payments will put the retiree into a HIGHER tax bracket.
When filing your taxes, consider all different forms of income when reporting to the IRS. If you are using an in-person accountant, it is OK to bring all paperwork including your non-taxable VA and/or social security payment information. It is better for the accountant to tell you what is NOT needed then to accidentally not report income to the IRS. Key take-a-ways: retirement pay is income and taxable. Service-connected disability payments are NOT taxable. Military and civilian retirement payments are COMBINED for IRS purposes.