Include Disability Payments From the Department of Veterans Affairs in Taxable Income

CBO periodically issues a compendium of policy options (called Options for Reducing the Deficit) covering a broad range of issues, as well as separate reports that include options for changing federal tax and spending policies in particular areas. This option appears in one of those publications. The options are derived from many sources and reflect a range of possibilities. For each option, CBO presents an estimate of its effects on the budget but makes no recommendations. Inclusion or exclusion of any particular option does not imply an endorsement or rejection by CBO.

Billions of Dollars 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2021–
Change in Revenues 1.0 9.7 10.8 11.0 10.8 11.8 12.6 13.4 16.6 15.7 43.3 113.4

Data source: Staff of the Joint Committee on Taxation.
This option would take effect in January 2021.

The Department of Veterans Affairs (VA) provides disability compensation to veterans with medical conditions or injuries that occurred or worsened during active-duty service. VA’s disability payments are intended to compensate the average earnings that veterans would be expected to lose given the severity of their service-connected medical conditions or injuries, whether or not a particular veteran’s condition actually reduced his or her earnings. Disability compensation is not means-tested (that is, restricted to those with income below a certain amount), and payments are exempt from federal and state income taxes. Payments are in the form of monthly annuities and typically continue until the beneficiary’s death.

This option would include VA disability benefit payments in taxable income.