Arizona does not tax VA disability benefits. These payments are excluded from federal gross income under 26 U.S.C. § 104, and because Arizona builds its state return on your Federal Adjusted Gross Income, VA disability compensation never enters the state calculation in the first place. A separate federal statute, 38 U.S.C. § 5301, independently bars states from taxing VA benefits. Every dollar of your disability compensation stays with you.
Why the Exemption Holds
Two layers of federal law do the work. The first is 26 U.S.C. § 104(a)(4), which removes from gross income any pension, annuity, or similar payment received for personal injuries or sickness resulting from active military service.1Office of the Law Revision Counsel. 26 USC 104 – Compensation for Injuries or Sickness Because these payments are not part of your federal adjusted gross income, they never appear on your federal return. Arizona’s individual income tax return starts with that same federal number, so VA disability compensation is simply absent from the state calculation before Arizona’s own rules even apply.2Arizona Department of Revenue. Individual Income Tax Information
The second layer is 38 U.S.C. § 5301, which provides a blanket shield: all payments of benefits administered by the VA “shall be exempt from taxation.” That exemption reaches federal, state, and local taxes alike.3Office of the Law Revision Counsel. 38 USC 5301 – Nonassignability and Exempt Status of Benefits It covers monthly disability compensation, special monthly compensation for severe disabilities, and grants for adapted housing or vehicles. It does not follow the money into whatever you buy with it. A house purchased with VA disability funds is not itself tax-exempt because of the funding source.
Arizona does not require you to add back any federally exempt disability payments on your state return. With Arizona’s flat 2.5% income tax rate, the practical result is simple: VA disability pay faces zero state income tax, and you do not need withholding or estimated payments for those funds.4Arizona Department of Revenue. Individual Income Tax Highlights
CRDP and CRSC Are Taxed Differently
Veterans who qualify for both military retirement pay and VA disability compensation often receive one of two supplemental payments. The tax treatment is completely different.
Concurrent Retirement and Disability Pay (CRDP) restores retired pay that was previously offset by VA disability compensation. Because it is a restoration of retirement pay rather than a disability benefit, CRDP is fully taxable at the federal level and appears on your 1099-R as part of your total military retirement income.5Congressional Research Service. Concurrent Receipt of Military Retired Pay and Veteran Disability For Arizona, this matters less than it would elsewhere, because the state subtracts all military retirement pay from taxable income.
Combat-Related Special Compensation (CRSC) goes to retirees whose disabilities are linked to combat, hazardous duty, or hazardous exposures such as radiation or chemical agents. CRSC is tax-free at the federal level under 26 U.S.C. § 104(a)(4) as compensation for combat-related injuries. Like standard VA disability pay, it never enters your federal or Arizona gross income.6Office of the Law Revision Counsel. 26 USC 104 – Compensation for Injuries or Sickness
The distinction trips up veterans every filing season. If you receive CRDP, check your 1099-R carefully. That amount is already included in your total taxable military retirement figure, so reporting it separately will double-count your income.
Military Retirement Pay Is Also Tax-Free in Arizona
Setting disability aside, Arizona exempts all military retirement pay from state income tax. Under A.R.S. § 43-1022(26), the full amount of retired or retainer pay from the uniformed services is subtracted from Arizona gross income for tax years beginning after December 31, 2020. There is no cap.7Arizona Legislature. Arizona Code 43-1022 – Subtractions From Arizona Gross Income
Your entire pension from the Defense Finance and Accounting Service, whether based on years of service or a medical retirement, escapes Arizona’s 2.5% income tax. On Form 140, enter the full retirement amount as a subtraction in the adjustments section.8Arizona Department of Revenue. Military Tax Filing The retirement income still shows up on your federal return, and you still need your 1099-R from DFAS to document it, but Arizona zeroes it out.
Survivor Benefits
The exemption is not limited to the veteran. Dependency and Indemnity Compensation (DIC) paid to surviving spouses and dependents of veterans who died from service-connected conditions is also tax-exempt.9Veterans Affairs. Current DIC Rates for Spouses and Dependents The same logic applies: DIC is a VA-administered benefit, so 38 U.S.C. § 5301 shields it from taxation, and it does not appear in the survivor’s federal adjusted gross income. Arizona therefore never sees it.3Office of the Law Revision Counsel. 38 USC 5301 – Nonassignability and Exempt Status of Benefits
Other VA payments that follow the same rule include grants for wheelchair-accessible homes, grants for adapted vehicles, and benefits under dependent-care assistance programs. If the VA administers the payment and it relates to service-connected disability or death, it is almost certainly exempt from both federal and Arizona income tax.
Property Tax and Vehicle Exemptions for Disabled Veterans
Beyond income tax, Arizona offers property tax relief tied to a VA disability rating. Under A.R.S. § 42-11111, a disabled veteran can claim a property tax exemption on a primary residence. For 2025, the maximum exemption is $4,188, available only if the property’s total assessment does not exceed $28,459. A veteran with a partial rating receives a proportional share equal to the disability percentage.10Arizona Legislature. Arizona Revised Statutes Title 42 Taxation 42-11111 These figures are adjusted annually for inflation.
Income limits also apply. Total household income from all sources, including a spouse and any children living in the home, cannot exceed $34,901 for households without minor children, or $41,870 for households with minor children or a dependent with a total and permanent disability. These amounts are also adjusted each year.
Veterans with a 100% VA disability rating can claim a vehicle license tax and registration fee exemption for one personally owned vehicle under A.R.S. § 28-5802. The exemption carries over to a surviving spouse until remarriage or death. Bring proof of your 100% disability determination from the VA when you first register the vehicle.11Arizona Legislature. Arizona Code 28-5802 – Vehicle License Tax Exemption Veterans
Do You Even Need to File in Arizona?
If your only income is VA disability compensation, you likely do not need to file an Arizona return at all, because you have no taxable income to report. If you have other income alongside your VA benefits, gather these before starting:
- Your VA Benefit Summary Letter, which you can download through VA.gov to verify your disability status and payment amounts. The old eBenefits portal has been retired and these letters are now accessed directly at VA.gov.12Veterans Affairs. Download VA Benefit Letters
- Form 1099-R, if you receive military retirement pay. DFAS issues this through myPay.13Defense Finance and Accounting Service. Getting Your 1099-R
- Arizona Form 140, the standard resident income tax return. You will use the subtractions section to exclude your military retirement pay.14Arizona Department of Revenue. Form 140 – Resident Personal Income Tax Form
Because VA disability benefits are already excluded from your Federal Adjusted Gross Income, they do not require a separate subtraction entry on Form 140. Only military retirement pay needs the subtraction line. Arizona individual income tax returns for tax year 2025 are due April 15, 2026; a timely extension moves the filing deadline to October 15, 2026, but any tax owed must still be paid by April 15.4Arizona Department of Revenue. Individual Income Tax Highlights