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Work-therapy income ruled tax-free for vets

Veterans using two work-therapy programs may be eligible for tax refunds because of a new ruling that makes tax-free the income paid to them under the programs.

The Department of Veterans Affairs announced Monday that about 19,000 people who used the Compensated Work Therapy program and 8,500 people who used an Incentive Therapy program can file with the Internal Revenue Service for refunds of income taxes for the tax years of 2004, 2005 and 2006 and will not have to pay income tax for 2007.

Amended tax returns can be filed using IRS Form 1040X, VA officials said.

Until the ruling, the VA had provided veterans who used the program an annual income statement that also was provided to the IRS. A U.S. tax court has ruled that work-therapy payments are not subject to tax, reversing a 1965 ruling that they were taxable.

VA officials said the two programs assist veterans who are unable to work and support themselves.

Compensated Work Therapy teaches new job skills to veterans who are paid by VA while receiving training from public and private contractors. They work no more than 6½ hours a day, and are paid according to how much work they complete.

Incentive Therapy provides payments to seriously disabled veterans for work done at VA medical centers. They are paid about half of the hourly federal minimum wage for jobs that are largely based on boosting their self-esteem and to prepare them for other job training programs.

DISCUSS: The tax-free ruling