If you suffered a disabling injury during military service, you should be receiving some sort of compensation. If it comes through the Veteran's Administration, it might not be subject to federal income taxes. There are some conditions under which you don't even have to report the compensation as income, whether it's a subsistence allowance or money for a specific purpose. The amount and type of your compensation will vary with the severity of the disability and the purpose of the compensation. Clarify the type of disability compensation with the Veteran's Administration before doing your taxes.
You can exclude from your income tax Veterans Administration disability payments for any type of combat-related injury. This covers injuries incurred during armed combat or caused by an act of war. It also covers injuries received during conditions simulating war, such as training exercises or maneuvers or for any injuries during hazardous duty service.
A disability pension granted for years of service and not a specific injury must be reported as income in most cases. The exception is if part of the pension qualifies for exclusion under the service-connected disability provisions. Then you can exclude the part related to the service-connected disability. You also can claim some exemption retroactively if you retired from the service before being declared eligible for disability payments.
The veteran's disability exclusion applies to subsistence compensation paid to veterans or their families. It also covers allowances for education, training or Veterans Administration work therapy programs. It includes grants for homes for wheelchair living and for special vehicles for those who lost sight or use of limbs.
The veteran's disability tax exclusion is complete for those eligible for compensation before September 1975. Insurance benefits and death gratuities to beneficiaries or survivors of qualified veterans also are exempt from taxes in most cases.
You also can exclude from income any disability payments for injuries from a terrorist attack or military action. This is somewhat broader than the combat-related injury provision and is not limited to payments from the Veterans Administration.