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Are Yellow Ribbon Benefits Taxable?

Author Ron Kness is no longer in the service.

Q: My daughter is using her husband’s benefits for schooling under Yellow Ribbon. She receives tuition, book stipend and BAH. She has heard that the BAH is taxable. Is this true? And, if so, why? When you are active duty, it is not.

A: No. Any veterans’ benefits including Yellow Ribbon Program benefits from the Post 9/11 GI Bill, paid under any law administered by the Department of Veterans Affairs (VA) should not be reported as income to the Internal Revenue Service (IRS). You will not receive a W-2 from the VA. Here is what IRS 970 publication has to say about GI Bill income:

“Payments you receive for education, training, or subsistence under any law administered by the Department of Veterans Affairs (VA) are tax free. Do not include these payments as income on your federal tax return.

If you qualify for one or more of the education benefits discussed in chapters 2 through 13*, you may have to reduce 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.

Example.

You have returned to college and are receiving two education benefits under the latest GI Bill: (1) a $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 (explained in detail in chapter 2). 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.”

*Chapters 2 through 13 are as follows:

2. American Opportunity Credit

3. Hope Credit

4. Lifetime Learning Credit

5. Student Loan Interest Deduction

6. Student Loan Cancellations and Repayment Assistance

7. Tuition and Fees Deduction

8. Coverdell Education Savings Account (ESA)

9. Qualified Tuition Program (QTP)

10. Education Exception to Additional Tax on Early IRA Distributions

11. Education Savings Bond Program

12. Employer-Provided Educational Assistance

13. Business Deduction for Work Related Education.

This should help them when it is time to file taxes. If they prepare their own taxes, more information can be found in the 970 publication. If they have them professionally prepared, the tax preparer will know how to handle GI Bill income.

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