As of 2015, most veterans' benefits are not taxable and should not be reported as income on tax returns, explains My Army Benefits. Benefits that are excluded from taxes include education, training and subsistence allowances, disability compensation, and pension payments for disabilities paid to veterans or their families.
Benefits paid under a dependent-care assistance program are also excluded from taxes. Veterans may exclude 100 percent of any severance benefit from their income if they received a lump-sum disability severance payment and later are awarded veterans disability benefits.
Lump-sum readjustment or other non-disability severance payments received upon a veteran's release from active duty must be included in his income, explains My Army Benefits.