Tax code is very clear about Veterans benefits collected by taxpayers who have served their country in the army, navy, air force, or coast guard. As long as the benefits are paid out by the Department of Veteran Affairs, they are tax-free and you dont have to include them in your gross income.
The following Allowances, Grants, and Payments are tax-free (following text provided by the IRS):
- Education, training, and subsistence allowance.
- Disability compensation and pension payments for disabilities paid either to veterans or their families.
- Grants for homes designed for wheelchair living.
- Grants for motor vehicles for veterans who lost their sight or the use of their limbs.
- Veterans insurance proceeds and dividends paid either to veterans or their beneficiaries, including the proceeds of a veterans endowment policy paid before death.
- Interest on insurance dividends you leave on deposit with the VA.