VA Disability Compensation: Tax-Free Income That Boosts Your Net Worth

If you're a veteran receiving VA disability compensation—or considering filing a claim—you're sitting on one of the most valuable financial benefits available to any American. Unlike almost every other form of income, VA disability compensation is completely tax-free at the federal, state, and local level.

That tax-free status isn't just a nice perk. It's a significant wealth-building advantage that can add up to tens of thousands of dollars over your lifetime.

How VA Disability Ratings Work

The VA assigns disability ratings in 10% increments, from 0% to 100%, based on how your service-connected conditions affect your ability to function in daily life. The higher your combined rating, the higher your monthly payment.

Here's what veterans with no dependents receive monthly as of December 2025:

Disability Rating	Monthly Payment
10%	$180.42
20%	$356.66
30%	$552.47
50%	$1,132.90
70%	$1,808.45
100%	$3,938.58

If you have dependents—a spouse, children, or dependent parents—your payments increase. For example, a veteran rated at 70% with a spouse and one child receives $2,074.45 per month. A 100% disabled veteran with a spouse and child receives $4,318.99 monthly.

Why Tax-Free Status Is a Game-Changer

Let's do the math. A veteran receiving $1,808.45 per month at 70% gets $21,701.40 annually. If that same amount came from regular employment income, someone in the 22% federal tax bracket would owe roughly $4,774 in federal taxes alone—plus state taxes in most states.

That's money you keep instead of sending to the IRS.

The effective value of VA disability compensation is significantly higher than its face value. A $21,701 tax-free payment is equivalent to roughly $27,800 in pre-tax income for someone in the 22% bracket. At higher ratings and tax brackets, the advantage grows even larger.

This is why tracking your complete financial picture matters. VA compensation isn't just monthly income—it's a reliable, inflation-adjusted, tax-advantaged income stream that should factor into how you think about your financial future.

How to Factor VA Compensation Into Your Net Worth

Your net worth is your assets minus your liabilities. While VA disability payments aren't an "asset" you can sell, they represent guaranteed future income that affects your financial planning in several ways:

1. Reduce your FIRE number. If you're pursuing financial independence, VA compensation reduces how much you need in investments. A veteran receiving $2,000/month in VA benefits needs $600,000 less in their portfolio to generate that same income (using the 4% rule).

2. Increase your savings rate. Tax-free income means more money available to invest and build wealth. That $4,774 you're not paying in taxes? Put it in an index fund for 20 years at 7% returns, and it becomes $18,500.

3. Improve your debt-to-income ratio. When applying for mortgages, VA compensation counts as income without the tax burden eating into your purchasing power.

4. Build your emergency fund faster. The extra cash flow from tax savings accelerates your path to a solid emergency fund.

When you sign up for Nova, you can track your VA compensation as recurring income, helping you see exactly how this benefit fits into your overall financial picture alongside your other accounts, investments, and assets.

Understanding Combined Ratings

Here's where many veterans get confused: VA ratings don't add up the way you'd expect. If you have a 50% rating for one condition and a 30% rating for another, your combined rating isn't 80%—it's 65%.

The VA uses "whole person theory." They start with 100% (your whole body) and subtract the first rating. Then they take the remaining percentage and apply the second rating to that amount.

Example:

• Start: 100%
• First condition (50%): 100% × 50% = 50% disability → 50% remaining
• Second condition (30%): 50% × 30% = 15% additional disability
• Combined: 50% + 15% = 65% (rounded to 70% for payment)

The VA rounds to the nearest 10%, so a 65% combined rating becomes a 70% payment rating.

This matters because many veterans have multiple service-connected conditions. Understanding combined ratings helps you know what to expect—and whether filing for additional conditions could push you to the next payment level.

Resources for Applying and Appealing

If you haven't filed for VA disability yet, or if you believe your rating should be higher, here are your key resources:

• VA.gov Disability Claims: File your claim online directly with the VA
• Veterans Service Organizations (VSOs): Free help from accredited representatives at the VFW, DAV, or American Legion
• Higher-Level Review: If you disagree with a decision, request a review by a senior reviewer
• Board of Veterans' Appeals: For formal appeals, the BVA handles contested decisions

Many veterans are under-rated. If your conditions have worsened or you have new evidence, filing for an increase is your right.

Your Benefits, Your Future

VA disability compensation is more than a monthly check—it's a foundational piece of your financial security. The tax-free nature means every dollar goes further, and the inflation adjustments (COLA) mean your purchasing power keeps up over time.

Whether you're building toward financial independence, saving for your family's future, or just trying to get a clear picture of where you stand, understanding and tracking your VA benefits is essential.

Start tracking your complete net worth with Nova—your VA benefits, investments, accounts, and more—all in one place. Your first 30 days are free.

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