It is no secret that due to the large presence the US Military had in Germany for decades many US Soldiers stayed in country after their time in service or retired here altogether. Out of those who stayed almost all at some point in their career had deployed to combat theatres overseas (Vietnam, Grenada, Panama, Persian Gulf, Somalia to name a few). Depending on the scope, size and nature of the theatre many of those Soldiers returned with wounds and injuries. Those wounds are sometimes obvious, sometimes invisible, sometimes they fester and surface only years later. Prominent silent or late killers are Agent Orange for the men who had fought in Vietnam or PTSD for pretty much anybody who spent time in a war zone.
When a US Soldier dies on active duty or a US Veteran dies as a result of a service-related injury the surviving spouse is eligible for DIC benefits.
If this spouse is a German national, living in country we have found it not uncommon that those DIC benefits will either be treated like a normal German retirement and fully taxed, or be considered at least for tax bracket purposes.
Both approaches are wrong. Those DIC benefits are completely tax-irrelevant in Germany. While we always recommend reporting them, they should not have any tax bearing on the German side at all. This is because they would be pushed down the same route as regular VA disability benefits under local German tax law. Another avenue, which can be used to achieve the same effect is article 19 of the US-German tax treaty.
When trying to keep your DIC benefits tax free in Germany, keep in mind please that we may need to conduct some research into your late spouse’s service and medical history. This is because we may need to substantiate that the reason for the payments are founded in the times spent in a warzone.
Please let us know if you are drawing DIC benefits and feel like the German tax office is handling them wrong. We are happy to go head-to-head with them.
Update June 2026: We have covered VA benefits extensively in several articles. However, some German tax offices have argued that those benefits are not as tax irrelevant as they are under US law, and would need to be considered for tax rate purposes (=Progression), effectively putting people’s German tax base in a higher tax bracket due to the circumstance that they are drawing VA benefits. At taxpatation we have always thought this was unsubstantiated, grossly wrong and put up a fight over it. On April 23 the German Tax Supreme court has confirmed this stance and ruled that the VA benefits are NOT to be considered even for tax rate purposes. Effectively this means that you should make prosaic mention of them but you will not see any tax effect at all. Albeit the ruling was not for one of our clients we are happy that it mirrored a position we have long been taking and fighting for separately with various tax offices! We would like to point out though that the ruling pertained to actual VA disability benefits, not DIC ones, but there is no reason the latter should see any other treatment. However, we continue to advice that there should be at least a prosaic mentioning, so one can fight it out in the open with the tax office if need be. Please let your taxperts know if you are wondering whether your VA or DIC benefits are being treated properly – as always, we are happy to brawl on your behalf!
