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Today I got the shock of my life when I heard from my Mothers tax assessor. I take care of my Mother full time and we have been saved by the A&A benefit. Now that it has had small increases added to it, she doesn't qualify for a tax break on her Property taxes (She has a life estate on her house) Now she has to pay $6000 a year in taxes which is more than half of her benefit. She has zero assets and has severe alz. I dealt with the town and he says "income is income." I called the State also and they agreed. We live in nh. He said he didn't care if medicaid, or any other program doesn't consider it income, they are Federal and he is State. IF anyone has any info or loopholes I would surely appreciate it.

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Just found the section of IRS Publication 525 addressing nontaxable income.

http://www.irs.gov/publications/p525/ar02.html.

Look under "Veteran's Benefits". Without proofing word for word, it looks like the same language as I quoted above.
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I was interested in this question as well, especially since your local tax folks don't seem to understand the difference between federal and state laws. I also remembered that I had to research a specific issue on taxability of certain veterans assets and found the enabling statute, the URL for which I can't now find. So I did some quick checking.

1. Statutory authority for the Aid and Attendance pension is 38 U.S.C. You may also call.
Source: seniorcareforveterans

2. This is a pretty significant statute, with a lot of material to read to find the taxable issues. I went through quickly but it takes sometime to be thorough.
There are also specific terms used to classify the various funds available, and it does take some time to research them.

3. I did find that Aid and Attendance is classified as a SMP - Special Monthly Pension. begleylawyer

That classification may make a difference as to whether funds are retirement or pension, or other.

4. I also found on a veteran's aid website a reference to IRS Publication 907. I checked this out very quickly but perhaps you might want to spend more time.

Cutting to the chase,
http://www.irs.gov/publications/p907/ar02.html

"VA disability benefits. Do not include disability benefits you receive from the Department of Veterans Affairs (VA) in your gross income. If you are a military retiree and do not receive your disability benefits from the VA, see Publication 525 for more information.

Do not include in your income any veterans' benefits paid under any law, regulation, or administrative practice administered by the VA. These include:

Education, training, and subsistence allowances;

Disability compensation and pension payments for disabilities paid to veterans or their families;"

(NOTE: "...pension payments for disabilities paid to veterans or their families." This would seem to me to include Aid and Attendance, but that's just my cursory interpretation.

"Grants for homes designed for wheelchair living;

Grants for motor vehicles for veterans who lost their sight or the use of their limbs;

Veterans' insurance proceeds and dividends paid to veterans or their beneficiaries, including the proceeds of a veteran's endowment policy paid before death;

Interest on insurance dividends left on deposit with the VA;

Benefits under a dependent-care assistance program;

The death gratuity paid to a survivor of a member of the Armed Forces who died after September 10, 2001; or

Payments made under the VA's compensated work therapy program."

The question would be whether Aid & Attendance is considered one of these categories. I think it is, but I'm not an authority.

I share all of this just to illustrate how complex the issue can become.

5. And, then, right on point: See Roxanne Rose's comment; second post at

https://www.agingcare.com/questions/aid-and-attendance-benefits-exempt-from-income-tax-146477.htm

This is followed by a post from Ralph Robbins, later clarified to state that:

"All VA non-service connected pensions (Basic, Homebound, and Aid and Attendance) are NOT deemed as income for federal and state income tax purposes."

(I give up! I keep losing parts of this message but I think you have enough to go on.)

Good luck. And if you have to, use the appeals challenge of tax assessment, get a service organization such as the VFW or American Legion to confirm the nontaxability and ask if they have any advice, contact one of your legislators, both federal and state, and/or hire a big guns law firm. It would be worth the expense.
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I'm hoping that by answering this, we bump this question up to the top and someone with real expertise answers.
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I would ask your mom's lawyer to weigh in on this.
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