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Per the IRS Publication 907 Tax Highlights for Persons with Disabilities, page 4:

VA disability benefits. 

Do not include disability benefits you receive from the Department of Veterans Affairs (VA) in your gross income. If you are a military retiree and do not receive your disability benefits from the VA, see Pub. 525 for more information.

Do not include in your income any veterans' benefits paid under any law, regulation, or administrative practice administered by the VA. These include:

  • Education, training, or subsistence allowances;
  • Disability compensation and pension payments for disabilities paid 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 the veteran or their beneficiaries, including the proceeds of a veteran's endowment policy paid before death;
  • Interest on insurance dividends left on deposit with the VA;
  • Benefits under a dependent-care assistance program;
  • The death gratuity paid to a survivor of a member of the Armed Forces who died after September 10, 2001; or
  • Payments made under the VA's compensated work therapy program.

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