Does Tennessee's $60,000 income cap for disabled-veteran property tax relief illegally tax federally exempt veterans' benefits when it counts those benefits as income?

Plain-English summary

Tennessee's property tax relief program for certain disabled veterans reimburses qualifying veterans for the property taxes paid on their residence. To qualify, a veteran's "annual income from all sources" could not exceed $60,000 (or the amount set in the general appropriations act). By the statute's terms, "annual income from all sources" included veterans entitlements.

A state representative asked whether counting federal VA benefits as part of that income calculation conflicted with 38 U.S.C. § 5301(a)(1), which exempts "payments of benefits" administered by the VA "from taxation."

The AG concluded there was no conflict. The federal exemption bars taxation of the VA benefit payments themselves. It does not bar a state from looking at those payments when deciding whether a veteran qualifies for a separate state tax relief program. Tennessee was not taxing the benefits. It was using them as a financial-need yardstick to decide which veterans got help paying their property tax. The property tax is on real property, not on the veterans' benefits.

Currency note

This opinion was issued in 2016. Subsequent statutory amendments, court decisions, or later AG opinions may have changed the analysis. Treat this page as historical context, not current legal advice. Verify current law before relying on any specific rule, deadline, or remedy mentioned here.

Background and statutory framework

Tenn. Code Ann. § 67-5-704 set up a state-funded reimbursement program. Section 704(a)(1) directed the state to pay disabled veterans from general funds "the amount necessary to reimburse such taxpayers for all or part of the local property taxes paid for a given tax year" on a residence the veteran owned and occupied. Section 704(a)(2)(A) capped eligibility at an "annual income from all sources" of $60,000 (or such other amount as set in the appropriations act). The statute explicitly identified "veterans entitlements" as one of the income sources that count toward the cap.

The federal anti-taxation provision in 38 U.S.C. § 5301(a)(1) provides that "payments of benefits" under "any law administered by the Secretary [of Veterans Affairs] shall be exempt from taxation." That language is taxpayer-protective, but its operation is narrow: it prevents states from imposing a tax on the benefit payment itself.

The AG's reasoning relied on three points. First, the property tax that 704(a)(2)(A) interacts with is not a tax on payments. It is a tax on real property, and the relief program just reimburses some of the property tax bill. Second, even if reimbursement is reduced because counted income pushes a veteran past the $60,000 line, that reduction in help is not the same as a tax on the underlying benefit. Third, federal preemption requires a conflict with the federal exemption's actual operation, not merely with its underlying policy goals. The AG could not identify any actual tax that 38 U.S.C. § 5301(a)(1) prohibited and that Tennessee was attempting to impose.

The opinion also noted that the requestor had pointed to page 18 of IRS Publication 525 (2015), which discusses the federal income-tax treatment of veterans benefits. The AG concluded there was no conflict with that guidance either, for the same reason: IRS Publication 525 deals with whether benefits are taxable income for federal income tax purposes, not with whether they count when a state runs a means test for a separate relief program.

Common questions

Q: What is Tennessee's disabled-veteran property tax relief program?
A: Under Tenn. Code Ann. § 67-5-704 at the time of the opinion, qualifying disabled veterans could receive a state reimbursement for some or all of the local property tax they paid on their residence. The reimbursement was paid from general state funds.

Q: What did the $60,000 cap include?
A: "Annual income from all sources," which the statute defined to include veterans entitlements among other government program payments. A veteran with $30,000 in VA benefits and $35,000 in other income would exceed the cap.

Q: Does counting VA benefits as income tax them?
A: No, in the AG's view. The benefit dollars flowed to the veteran tax-free. Tennessee simply used the existence of those dollars to decide whether a separate relief program covered the veteran. That is means-testing, not taxation.

Q: Could a state ever violate 38 U.S.C. § 5301(a)(1)?
A: Yes, if it imposed a tax directly on the benefits. The federal provision is about taxation, not about administrative use of the underlying numbers.

Q: Does this apply to other means-tested benefits, like elderly homestead exemptions?
A: The opinion did not address them. But the reasoning, that counting income for an eligibility threshold is not taxation, would likely apply to similar state means-tests. Each statute would need its own analysis.

Citations and references

Statutes (as cited in the opinion):

• Tenn. Code Ann. § 67-5-704(a)(1) (reimbursement authority)
• Tenn. Code Ann. § 67-5-704(a)(2)(A) (income threshold)
• 38 U.S.C. § 5301(a)(1) (federal exemption of VA benefits from taxation)

Other authorities referenced:

• IRS Publication 525 (2015), p. 18 (taxability of veterans benefits for federal income tax purposes)

Source

• Landing page: https://www.tn.gov/attorneygeneral/opinions.html
• Original PDF: https://www.tn.gov/content/dam/tn/attorneygeneral/documents/ops/2016/op16-012.pdf

Original opinion text

Validity of Annual Income Threshold for Disabled Veterans' Property Tax Relief

Question 1
Does the maximum annual income threshold of Tenn. Code Ann. § 67-5-704(a)(2)(A)
conflict with 38 U.S.C. § 5301(a)(1), which mandates that veterans' benefits be exempt from
taxation?

Opinion 1
No. The annual income threshold provided in Tenn. Code Ann. § 67-5-704(a)(2)(A) does
not result in the taxation of a "payment" under 38 U.S.C. § 5301(a)(1).

ANALYSIS

Tennessee Code Ann. § 67-5-704 provides tax relief for certain disabled veterans with
respect to local property tax on their residences.

There shall be paid from the general funds of the state to certain disabled veterans
the amount necessary to reimburse such taxpayers for all or part of the local
property taxes paid for a given tax year on that property that the disabled veteran
owned and used as the disabled veteran's residence as provided in this section.

Tenn. Code Ann. § 67-5-704(a)(1).

To qualify for this property tax relief, "the taxpayer's annual income from all sources shall
not exceed sixty thousand dollars ($60,000), or such other amount as set forth in the general
appropriations act." Tenn. Code Ann. § 67-5-704(a)(2)(A). The language "annual income from
all sources" in subsection 704(a)(2)(A) necessarily includes benefits under government programs,
such as payments of veterans' benefits under Title 38 of the United States Code. See id. (referring
to "veterans entitlements" as one of several sources of income from government programs within
the meaning of 704(a)(2)(A)). This income threshold is used solely to determine eligibility for
state property tax relief.

Veterans' benefits are not taxable under federal law. Pursuant to federal law, "payments
of benefits" under "any law administered by the Secretary [of Veterans Affairs] shall be exempt
from taxation . . . ." 38 U.S.C. § 5301(a)(1). You have asked whether subsection 704(a)(2)(A)
conflicts with this federal prohibition on taxation of "payments of benefits" by requiring payments
of veterans' benefits to be included in the calculation of income for purposes of determining
eligibility for Tennessee's property tax relief.

There is no conflict. The federal statute prohibits taxation of payments of veterans'
benefits, not the taxation of property owned by the individuals receiving those payments. Nor is
taxation of property functionally the equivalent of taxation of payments of veterans' benefits.
Moreover, Tennessee is not in fact taxing any income received by veterans from the payment of
veterans' benefits. It is merely using payment of those benefits as part of the calculation to
determine income eligibility for property tax relief under Tenn. Code Ann. § 67-5-704.

For the same reasons, there is no conflict with the guidance offered at page 18 in IRS
Publication 525 (2015), to which your opinion request makes reference.

HERBERT H. SLATERY III
Attorney General and Reporter

ANDRÉE SOPHIA BLUMSTEIN
Solicitor General

JAMES P. URBAN
Assistant Attorney General

Requested by:
The Honorable Joe Pitts
State Representative
32 Legislative Plaza
Nashville, TN 37243