IRS PUB 907: 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, and subsistence allowances, Disability compensation and pension payments for disabilities paid either to veterans or their families,
IRS PUB 17, pg 95: VA payments. Allowances paid by the Department of Veterans Affairs are not included in your income. These allowances are not considered scholarship or fellowship grants.
IRS PUB 970 Ch1 Pg 8 Veterans’ Benefits Veterans Affairs (VA) are tax free. Do not include these Payment for services. Generally, you must include in payments as income on your federal tax return. If you qualify for one or more of the education benefits discussed in chapters 2 through 12, you may have to the student required as a condition of the amount of education expenses qualifying for a specific benefit by part or all of your VA payments. This applies only to the part of your VA payments that is required to be used for education expenses.
You may want to visit the Veteran’s Administration web-site at www.gibill.va.gov for specific information about the part of any scholarship or fellowship that represents pay- various VA benefits for education.
Example. You have returned to college and are receiving two education benefits under the latest GI Bill: (1) a gram, or $1,534 monthly basic housing allowance (BAH) that is directly deposited to your checking account, and (2) $3,840 paid directly to your college for tuition. Neither of these benefits is taxable and you do not report them on your tax return. You also want to claim an American opportunity credit on your return. You paid $5,000 in qualified education expenses (see chapter 2, American Opportunity Credit, later). To figure the amount of credit, you must first subtract the $3,840 from your qualified education expenses because this payment under the GI Bill was required to be used for education expenses. You do not subtract any amount of the BAH because it was paid to you and its use was not restricted.
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