December 18, 2007 12:00 am

Some Disabled Vets Entitled to Tax Refunds

While most work-related payments are taxable, there are some exceptions. Early in 2007, the Tax Court said that payments to disabled veterans under the Veterans Administration's work therapy program are not taxable as income. The IRS had been taxing such payments since 1965, but it has now agreed with the Tax Court that payments from the VA's Special Therapeutic and Rehabilitation Fund are tax free.

The VA contracts with private industry to enable disabled veterans to learn new job skills, re-learn successful work habits, and regain a sense of self-esteem. The payments are not actual compensation for the work they do under the program.

Those who paid tax on these benefits in 2004, 2005, or 2006 can claim a refund by filing an amended return using IRS Form 1040X. The form must be filed by paper; electronic filing cannot be used for an amended return.

Tax Glossary

Original issue discount (OID)

The difference between the face value of a bond and its original issue price. OID is reported on an annual basis as interest income.

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