Veteran Tax Guide 2026

Veterans have access to significant tax benefits that many don't fully understand or take advantage of. This guide covers every major tax consideration for veterans and recently separated service members, from federal exclusions to state-by-state comparisons to free filing resources. Updated for the 2026 tax year.

1. Federal Tax Benefits for Veterans

VA Disability Compensation Is Tax-Free

All VA disability compensation is completely excluded from federal taxable income under 26 U.S.C. 104(a)(4). This includes:

• Monthly VA disability payments at any rating (10%-100%)
• Combat-Related Special Compensation (CRSC) — tax-free even though it replaces retired pay
• Concurrent Retirement and Disability Pay (CRDP) — only the VA disability portion is tax-free; the retirement portion remains taxable
• Special Monthly Compensation (SMC) — all SMC tiers (K through T) are tax-free
• Individual Unemployability (TDIU) payments — tax-free at the 100% rate

Combat Zone Tax Exclusion (CZTE)

If you served in a designated combat zone, your military pay earned during those months is excluded from federal income tax:

• Enlisted members: All military pay earned during any month you served in a combat zone is tax-free — no cap
• Officers: Exclusion is capped at the highest enlisted pay rate plus hostile fire/imminent danger pay for that month
• Qualifying zones (2026): Afghanistan, Iraq, Syria, the Arabian Peninsula (includes Kuwait, Saudi Arabia, UAE, Bahrain, Qatar, Oman), the Sinai Peninsula, Somalia, Kosovo, and adjacent waters/airspace
• Partial month rule: If you served even one day in a combat zone during a month, the entire month's pay qualifies

Earned Income Tax Credit (EITC) for Veterans

Veterans can strategically use nontaxable combat pay to maximize the EITC:

• You can elect to include nontaxable combat pay as earned income for EITC calculations
• This can increase your EITC if combat pay pushes your earned income into a higher credit range
• For 2026, the maximum EITC for a family with 3+ children is approximately $7,830
• Run the calculation both ways (with and without combat pay) to see which gives you a larger refund

2. State Income Tax on Military Retirement

Where you live in retirement matters enormously. Some states fully tax military retirement pay, while others exempt it entirely. Here is the current breakdown:

States With No Income Tax (Best for Retirees)

These states don't tax any income at all, making military retirement pay completely tax-free:

• Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, Wyoming — no state income tax on any income
• New Hampshire — no tax on earned income (only taxes interest and dividends, and is phasing that out)

States That Fully Exempt Military Retirement Pay

These states have income tax but specifically exempt all military retirement pay:

• Alabama, Arkansas, Connecticut, Hawaii, Illinois, Iowa, Kansas, Louisiana, Maine, Massachusetts, Michigan, Minnesota, Mississippi, Missouri, New Jersey, New York, North Carolina, North Dakota, Ohio, Oregon, Pennsylvania, West Virginia, Wisconsin

States That Partially Exempt Military Retirement Pay

• Arizona: Up to $3,500 exempt
• Colorado: Up to $24,000 exempt (age 55-64), full exemption at 65+
• Delaware: Up to $12,500 exempt (under 60), $12,500 (60+)
• Georgia: Up to $35,000 exempt (age 62-64), $65,000 (65+)
• Idaho: Partial deduction based on years of service
• Indiana: Up to $6,250 exempt
• Kentucky: Up to $31,110 exempt
• Maryland: Up to $15,000 exempt (first $5,000 is always exempt, additional based on age)
• Montana: Partial exemption based on federal adjusted gross income
• Nebraska: Phasing in full exemption by 2027
• New Mexico: Up to $30,000 exempt
• Oklahoma: Up to 75% exempt
• South Carolina: Up to $17,500 exempt (under 65), deduction increases at 65+
• Utah: Tax credit that effectively reduces or eliminates tax for most military retirees
• Virginia: Up to $40,000 exempt (age-adjusted, phasing in through 2026)

3. TSP Withdrawal Tax Implications

Your Thrift Savings Plan withdrawals are taxed differently depending on which type of contributions you made:

Traditional TSP

• All withdrawals are taxed as ordinary income at your current federal tax rate
• State income tax also applies (unless you live in a no-income-tax state)
• Required Minimum Distributions (RMDs) begin at age 73 (under SECURE 2.0 Act)
• Early withdrawals before age 59 1/2 face a 10% penalty plus income tax

Roth TSP

• Qualified withdrawals after age 59 1/2 (and 5 years after first contribution) are completely tax-free
• No RMDs for Roth TSP starting in 2024 (SECURE 2.0 change)
• Combat zone Roth contributions are doubly advantaged — contributed tax-free, withdrawn tax-free

Tax-Exempt Contributions (Combat Zone)

• If you contributed to Traditional TSP from combat zone tax-exempt pay, those contributions come out tax-free
• The earnings on those contributions are still taxable upon withdrawal
• Track your tax-exempt balance on your TSP statements — the TSP tracks this separately

4. Property Tax Benefits by State

Many states offer property tax exemptions or reductions for disabled veterans. The most generous programs:

For complete details on your state, visit our All 50 States Veteran Benefits Guide.

5. Tax Filing Tips for Recently Separated Veterans

6. Free Tax Preparation Resources

7. Common Deductions Veterans Miss

Job Search Expenses (If Itemizing)

While the Tax Cuts and Jobs Act suspended miscellaneous itemized deductions through 2025, check current law for 2026 updates. Previously deductible job search expenses included:

• Resume preparation costs (professional writers, printing, mailing)
• Travel to job interviews (mileage, airfare, hotel)
• Employment agency fees
• These are only deductible when searching within the same occupation — transitioning military may qualify if translating to a similar civilian role

Moving Expenses for Military

Active duty military members who move due to a military order for a permanent change of station (PCS) can still deduct moving expenses even under current tax law. This is one of the few moving expense deductions that survived the 2017 tax reform:

• Deduction for unreimbursed moving costs related to PCS orders
• Applies to moves to your first post of active duty, subsequent PCS, and the final move home after separation
• Use IRS Form 3903 to claim the deduction
• Includes transportation of household goods, travel to new location, and lodging during the move

Uniform and Equipment Costs

If you must purchase or maintain uniforms that are not suitable for everyday wear (and your employer requires them), these costs may be deductible as an unreimbursed employee expense. Reservists can deduct unreimbursed uniform costs as an above-the-line deduction on Form 2106.

Education Credits

• American Opportunity Credit: Up to $2,500/year for the first 4 years of higher education. Out-of-pocket costs not covered by GI Bill qualify.
• Lifetime Learning Credit: Up to $2,000/year for any post-secondary education. No limit on years you can claim it.
• Key rule: You cannot double-dip — only expenses you actually paid (not covered by GI Bill) count toward education credits.

Medical Expense Deduction

• Medical expenses exceeding 7.5% of AGI are deductible if you itemize
• Veterans who pay for care outside the VA system (dental, vision, specialty care) should track these expenses
• Service-connected disability treatment at the VA is free and not deductible (you didn't pay for it)
• Travel to VA medical facilities may qualify as a medical expense deduction

Charitable Contributions

Veterans who donate to qualifying veteran service organizations (DAV, VFW, American Legion, etc.) can deduct contributions if itemizing. Keep receipts for all donations over $250.