State Income Tax Exemptions for Disabled Veterans by State

Disabled veterans in many U.S. states can exclude part or all of their military disability income from state taxes. The amount you can exempt depends on your disability rating from the Department of Veterans Affairs (VA), your state of residence, and the type of income you receive. Some states exempt 100% of VA disability compensation from taxable income, while others offer partial exclusions or set dollar thresholds.

What Counts as Disabled Veteran Income for State Tax Purposes?

State income tax exemptions for disabled veterans typically apply to VA disability compensation the monthly tax-free payment the federal government sends to veterans with service-connected conditions. At the federal level, this income is already excluded from your gross income under 38 U.S.C. § 5301. But state-level exemptions matter because some states tax retirement income, pension payments, or military retirement pay that includes a disability component.

For example, if you receive military retirement pay and VA disability compensation, the way your state handles concurrent receipt receiving both payments at once affects your tax bill. States that exempt military retirement income give disabled veterans an additional advantage beyond the federal exclusion.

Which States Exempt All VA Disability Income From State Taxes?

Currently, nine states have no state income tax at all, which means there's nothing to exempt: Alaska, Florida, Nevada, New Hampshire (taxes only interest and dividends), South Dakota, Tennessee, Texas, Washington, and Wyoming. Veterans living in these states already avoid state income tax on disability pay without needing a special exemption.

Beyond those, many states with an income tax still fully exempt VA disability compensation. The specifics vary:

Alabama exempts military retirement income, including disability-related pay, from state income tax. Veterans in Alabama also benefit from property tax relief see the Alabama ad valorem tax exemption for details on that separate benefit.
North Dakota offers a tax credit for disabled veterans. You can review the qualification rules for the North Dakota disabled veteran tax credit to see if your disability rating meets the threshold.
West Virginia provides exemptions on both income and property taxes for qualifying veterans. The West Virginia property tax exemption amounts are listed separately for homeowners.
Illinois exempts all federally taxable retirement income, including military pensions, which effectively removes disability-related retirement pay from state taxation.
Hawaii excludes all VA disability compensation and provides an additional pension exclusion for residents.

A full comparison across states is available in this state-by-state breakdown of income tax exemptions.

How Does My VA Disability Rating Affect My State Tax Exemption?

Your VA disability rating expressed as a percentage from 0% to 100% directly affects which exemptions you qualify for in most states. Here's how it typically breaks down:

100% disabled veterans qualify for the broadest exemptions. Many states that offer partial exclusions at lower ratings fully exempt income for veterans rated at 100%.
50%–90% disabled veterans may qualify for partial exclusions. For instance, some states allow you to subtract a set dollar amount per percentage point of disability from your taxable income.
10%–40% disabled veterans often receive smaller deductions or credits. A few states set minimum disability thresholds, meaning veterans rated below 30% or 40% may not qualify at all.
0% service-connected veterans (those with a rated condition but no compensable disability) generally do not qualify for income tax exemptions, though they may receive other VA benefits.

Always check your state's specific rules. A rating letter from the VA that shows your combined disability percentage is the document state tax authorities use to verify your eligibility.

Do These Exemptions Apply to Military Retirement Pay Too?

This is where it gets complicated. VA disability compensation and military retirement pay are two separate income streams. Many states that exempt VA disability income do not automatically exempt military retirement pay. Some states offer a partial pension exclusion that covers a portion of retirement income, while others fully exempt it.

For example, states like Pennsylvania and Mississippi exempt military retirement income regardless of disability status. Other states only provide the exemption if the retirement pay is directly tied to a disability known as Chapter 61 retirement (medical retirement from the military).

If you receive both payments, your state's treatment of income tax exemptions for disabled veterans determines whether you owe taxes on the retirement portion.

How Do I Claim a Disabled Veteran Tax Exemption on My State Return?

The process varies by state, but the general steps are consistent:

Obtain your VA disability rating letter. Download it from VA.gov or request a copy from your regional VA office.
Check your state's tax form or instructions. Look for a specific line, schedule, or form dedicated to veteran or disability exemptions. Many states use a form like "Schedule V" or a veteran-specific worksheet.
Report the excluded income correctly. Some states require you to enter the full amount and then subtract the exempt portion. Others let you simply omit the exempt income from your return.
Attach supporting documentation. You may need to submit a copy of your VA rating letter or a state-specific certification form.
File on time. Most state income tax deadlines fall on April 15 or the next business day. Some states offer extensions, but late filing without an extension can trigger penalties even if your disability income is exempt.

What Common Mistakes Do Disabled Veterans Make With State Tax Exemptions?

Several errors come up repeatedly:

Assuming the federal exemption means you don't need to file a state return. Even if VA disability compensation is federally tax-free, your state may tax other income sources, and you still need to file if you have reportable income above the filing threshold.
Missing the exemption entirely. Some veterans don't realize their state offers an income tax exemption and pay taxes on income that should have been excluded. If you overpaid, you can usually amend your return for the last three to four years.
Confusing property tax exemptions with income tax exemptions. These are separate benefits with separate applications. Veterans in states like Alabama or West Virginia may qualify for both, but each requires its own filing. A broader overview of property tax exemptions by state can help clarify the difference.
Not updating their rating. If your disability rating increases, your exemption eligibility may change. A veteran who went from 40% to 70% could suddenly qualify for a much larger exclusion in states with tiered benefits.
Failing to claim retroactively. If you discover you've been eligible for an exemption for past tax years, most states allow amended returns. This can result in a meaningful refund.

Are There Income Limits or Other Restrictions?

Some states tie their veteran tax benefits to income thresholds, age requirements, or residency rules:

Income limits: A handful of states reduce or phase out the exemption above certain adjusted gross income levels. These thresholds differ widely some start phasing out at $50,000, others at $100,000 or more.
Residency: You generally must be a full-year resident of the state to claim the exemption. Part-year residents may receive a prorated benefit or nothing at all.
Filing status: In some states, the exemption changes depending on whether you file single, married filing jointly, or head of household. Joint filers sometimes receive a higher exclusion if both spouses are disabled veterans.
Surviving spouses: Certain states extend income tax exemptions to the surviving spouse of a deceased disabled veteran, sometimes until remarriage.

Practical Checklist: Claiming Your State Income Tax Exemption

Use this checklist before filing your state return:

Confirm your current VA disability rating and have your rating letter available
Look up your state's specific exemption rules and eligible income types
Identify whether your state uses a deduction, credit, or exclusion method
Check for income limits or residency requirements in your state
Gather documentation: VA letter, military retirement statements (if applicable), and prior-year state returns
Review your state's tax form instructions for the veteran exemption section
If you missed the exemption in past years, prepare amended returns
Consider whether you also qualify for a property tax exemption in your state these benefits stack and can save you thousands
File by your state's deadline or request an extension if needed

Tip: If you moved to a new state during the tax year, check the rules in both states. You may owe a partial-year return in your former state and a prorated exemption in your current one. The IRS and state tax agencies do not share information automatically, so it's your responsibility to apply for state-level exemptions in the right place.