M21-1 Manual  /  Part IX, Subpart iii, Chapter 1, Section K

Other Deductible Expenses

M21-1, Part IX, Subpart iii, Chapter 1, Section K

Overview

In This Section

This section contains the following topics:
TopicTopic Name
1Final Expense Deductions – Overview and Definitions
2Processing Final Expense Deductions
3Educational Expense Deductions
4Child’s Income Deductions
5Hardship Deductions From a Child's Income
6Specific Deductions for Gross Business Income and Disability or Death Expenses

1. Final Expense Deductions - Overview and Definitions

Introduction

This topic contains information on final expense deductions, including
  • general information on final expenses
  • definition of last illness
  • burial expenses
  • just debts of the Veteran
  • example 1 of just debts
  • example 2 of just debts, and
  • final expenses paid by a surviving spouse prior to the date of pension entitlement.

Change Date

April 20, 2026

IX.iii.1.K.1.a. General Information on Final Expenses

Under 38 CFR 3.272(h)(1) and 38 CFR 3.272(h)(2)(i), deductible final expenses include amounts paid by a
  • surviving spouse or child for the unreimbursed expenses of a Veteran’s last illness and burial as well as the Veteran’s just debts
  • Veteran for the unreimbursed expenses of a spouse’s or child’s last illness and burial, but not amounts paid for the spouse’s or child’s just debts, and
  • Veteran’s spouse or surviving spouse for the unreimbursed expenses of the Veteran’s child’s last illness and burial, but not amounts paid for the child’s just debts.

IX.iii.1.K.1.b. Definition: Last Illness

For the purposes of the final expense deduction, the term last illness means the period from the onset of the acute attack causing death to the date of death. Generally, expenses incurred more than one year prior to date of death should not be considered expenses of last illness. If death resulted from a lingering or prolonged illness instead of an acute attack, the period of last illness is considered to have begun at the time the person became so ill as to require the regular and daily attendance of another person.

IX.iii.1.K.1.c. Burial Expenses

Burial expenses include all funeral and burial expenses incident to disposition of the remains of deceased persons under 38 U.S.C. 2303. When counting burial expenses, do not deduct any expense for which the claimant will be reimbursed (including Department of Veterans Affairs (VA) reimbursement for burial benefits). Example: A surviving spouse claims $3,000 in burial expenses. VA paid $600 toward the burial and plot and $400 in transportation costs, for a total of $1,000. Therefore, only $2,000 of the claimed burial expenses is deductible for pension purposes.Reference: For more information on how to determine which burial-related expenses to count as final expenses, see M21-1, Part IX, Subpart i, 3.D.3.d.

IX.iii.1.K.1.d.
Just Debts of
the Veteran

Under 38 CFR 3.272(h)(1)(ii), deduct just debts only when the debts are those of a Veteran and they are paid by a surviving spouse or child claimant.Payments of unsecured debts incurred solely by the Veteran and debts incurred jointly by the Veteran and surviving spouse, for other than the purchase of real or personal property, are deductible as just debts.Payments of secured debts incurred jointly by the Veteran and surviving spouse for the purchase of real or personal property are not deductible as just debts. This includes payments on home and car loans.Notes:
  • Just debts of the Veteran paid during the Veteran’s lifetime cannot be deducted as a final expense.
  • If a deceased Veteran’s medical expenses are not deductible as final expenses, consider the possibility of deducting the expenses as just debts of the Veteran.

IX.iii.1.K.1.e. Example 1: Just Debts

Example: A surviving spouse claims a deduction for payment of just debts of the Veteran. Development reveals that the spouse has been making payments on a car note. The Veteran and surviving spouse were joint obligors on the note.Result: Payments on the car note are not deductible as just debts of the Veteran because the debt was jointly incurred by the survivor and the Veteran for the purchase of real or personal property (the car).

IX.iii.1.K.1.f. Example 2: Just Debts

Example: A surviving spouse claims a deduction for payment of just debts of the Veteran. The surviving spouse reports having paid for a vacation taken prior to the Veteran’s death. The Veteran and surviving spouse were joint obligors on the debt. Result: Since the obligation was not incurred for the purchase of real or personal property, amounts paid by the surviving spouse to liquidate the debt are deductible.

IX.iii.1.K.1.g. Final Expenses Paid by a Surviving Spouse Prior to the Date of Pension Entitlement

Expenses of last illness and burial expenses, for example, prepaid burial, paid before the date of pension entitlement, can be considered final expenses if paid by a surviving spouse. There is currently no time limit for allowing such expenses.Expenses of a Veteran’s last illness that were allowed as a medical expense deduction on the Veterans Pension or Parents’ Dependency and Indemnity Compensation account during the Veteran’s lifetime cannot later be deducted as a final expense on the surviving spouse’s pension award.Note: An individual can claim they bore the expense of a claimant’s last illness or final expenses, even if the deceased beneficiary claimed those same funds as unreimbursed expenses to reduce their income for VA purposes on an income-based benefit program (i.e., Pension or Survivors Pension).
Reference: For more information on the definition of bore the expense, see M21-1, Part XI, Subpart ii, 3.A.6.b.

2. Processing Final Expense Deductions


Introduction

This topic contains information on processing final expense deductions, including
  • period to deduct final expenses
  • example 1 of the general rule for deducting final expenses
  • example 2 of the general rule for deducting final expenses
  • example 3 of the final expenses paid during the calendar year following the year of death
  • example 4 of the final expenses paid by the surviving spouse before the Veteran’s death
  • example 5 of the final expenses paid by the surviving spouse after the Veteran’s death but before the date of pension entitlement
  • example 6 of the final expenses paid by the surviving spouse before the Veteran’s death and during the calendar year following the year of death
  • final expenses paid from joint accounts, and
  • reimbursed final expenses.

Change Date

June 6, 2019

IX.iii.1.K.2.a. Period to Deduct Final Expenses

General rule:Final expenses are deducted during the calendar year (or initial year) during which they are paid.Exceptions:The table below shows the exceptions to the general rule for deducting final expenses.
If the expenses are paid …Then deduct the expenses …
during the calendar year following the year of deathfor whichever of the following periods is advantageous:
  • the calendar year during which they are paid
  • the initial year, if the initial year begins during the calendar year of death, or
  • any 12-month period that begins during the calendar year of death.
by a surviving spouse for last illness or burial expenses of a deceased Veteran
  • before the date of the Veteran’s death, or
  • after the date of the Veteran’s death, but before pension entitlement begins
 for the initial year of entitlement .
Note: The delayed payment provision of 38 CFR 3.31 applies to the payment date if the expense deduction results in an increased pension rate for one month compared to the previous month.

IX.iii.1.K.2.b. Example 1: General Rule for Deducting Final Expenses

Example:
  • A Veteran died on April 19, 2014. At the time of death, the Veteran was not receiving VA benefits.
  • VA receives the surviving spouse’s Survivors Pension claim on May 2, 2014.
  • The surviving spouse’s only income is a $2,000 retroactive private pension payment received April 29, 2014.
  • The surviving spouse pays $1,000 in burial expenses (not reimbursed by a VA burial benefit) on December 14, 2014.
Result: Since the final expenses were paid during the calendar year of death, and the initial year begins during that calendar year, deduct the final expenses for the surviving spouse’s initial year of entitlement.The table below shows how income and expenses are counted and deducted to determine the income for VA purposes (IVAP).
DateIncome CountedExpenses DeductedIVAP
05-01-2014$2,000$1,000$1,000
05-01-2015$0$0$0

IX.iii.1.K.2.c. Example 2: General Rule for Deducting Final Expenses

Example:
  • A Veteran receives Veterans Pension based on IVAP of $750 per month from a private pension.
  • On January 24, 2015, the Veteran pays $3,000 in expenses from the spouse’s last illness, who died on December 29, 2013.
Result: Since the final expenses were paid after the calendar year following the year of death, deduct them for the calendar year during which they were paid, January 1, 2015, through December 31, 2015.Note: Because deducting the expenses will result in an increased rate for January compared to December, the award will reflect the deduction on February 1 per 38 CFR 3.31.The table below shows how income and expenses are counted and deducted on the award.
DateIncome CountedExpenses DeductedIVAP
12-01-2014$9,000$0$9,000
02-01-2015$9,000$3,000$6,000
01-01-2016$9,000$0$9,000

IX.iii.1.K.2.d. Example 3: Final Expenses Paid During the Calendar Year Following the Year of Death

Example:
  • The Veteran died on April 19, 2013. At the time of death, the Veteran was not receiving VA benefits.
  • VA receives the surviving spouse’s Survivors Pension claim on May 2, 2013.
  • The surviving spouse has no income until August 7, 2013 when $2,000 retroactive private pension is received.
  • On September 19, 2013, the surviving spouse receives another $1,000 retroactive private pension payment.
  • On March 24, 2014, the surviving spouse pays $2,000 in burial expenses.
  • On October 14, 2014, the surviving spouse pays expenses of the Veteran’s last illness of $800.
Result: Since the final expenses were paid during the calendar year (2014) following the calendar year of the Veteran’s death (2013), VA can deduct them for the initial year or for any 12-month period that is most advantageous to the claimant, provided it begins within the calendar year of death (2013).In this case, that means VA can deduct the $2,000 for the period September 1, 2013, through August 30, 2014, and deduct the $800 for the period October 1, 2013, through September 30, 2014.The table below shows how income and expenses are counted and deducted on the award.
DateIncome CountedExpenses DeductedIVAP
05-01-2013$0$0$0
09-01-2013$2,000$2,000$0
10-01-2013$3,000$2,800$200
09-01-2014$1,000$800$200
10-01-2014$0$0$0

IX.iii.1.K.2.e. Example 4: Final Expenses Paid by the Surviving Spouse Before the Veteran’s Death

Example:
  • The Veteran’s spouse pays $2,000 in expenses of the Veteran’s last illness and prepaid burial in January through March of 2014.
  • The Veteran dies on April 19, 2014. At the time of death, the Veteran is not receiving VA benefits.
  • On October 14, 2014, the surviving spouse’s Survivors Pension claim is received. VA determines the surviving spouse is entitled to aid and attendance (A&A).
  • The surviving spouse’s only income is $7,000 Social Security per year until January 23, 2015, when a $2,000 one-time private pension payment is received.
Result: Since the expenses were paid by the Veteran’s spouse before the Veteran died, VA can deduct them for the initial year, April 19, 2014, through April 30, 2015.The table below shows how income and expenses are counted and deducted on the award.
DateIncome CountedExpenses DeductedIVAP
05-01-2014$7,000$2,000$5,000
02-01-2015$9,000$2,000$7,000
05-01-2015$9,000$0$9,000
02-01-2016$7,000$0$7,000

IX.iii.1.K.2.f. Example 5: Final Expenses Paid by the Surviving Spouse After the Veteran’s Death but Before the Date of Pension Entitlement

Example:
  • The Veteran died on September 23, 2013.
  • On October 14, 2013, the Veteran’s surviving spouse pays $3,000 of the Veteran’s burial expenses.
  • On November 14, 2014, VA receives the surviving spouse’s claim for Survivors Pension.
  • The surviving spouse’s only income is Social Security of $7,500 per year.
Result: Since the expenses were paid after the date of death but before the date of Survivors Pension entitlement, VA can deduct them for the initial year, November 14, 2014, through November 30, 2015.The table below shows how income and expenses are counted and deducted on the award.
DateIncome CountedExpenses DeductedIVAP
12-01-2014$7,500$3,000$4,500
12-01-2015$7,500$0$7,500

IX.iii.1.K.2.g. Example 6: Final Expenses Paid by the Surviving Spouse Before the Veteran’s Death and During the Calendar Year Following the Year of Death

Example:
  • On June 30, 2013, the Veteran’s spouse pays $2,000 toward the expenses of the Veteran’s last illness.
  • The Veteran dies on July 12, 2013. At the time of death, the Veteran is not receiving VA benefits.
  • On July 25, 2013, VA receives the surviving spouse’s claim for Survivors Pension.
  • The surviving spouse’s only income is Social Security of $6,000 per year until October 2013, when a $4,000 retroactive pension payment is received.
  • On February 3, 2014, the surviving spouse pays $4,000 in burial expenses.
  • On September 3, 2014, the surviving spouse pays an additional $3,000 in burial expenses.
Result: The table below shows how income and expenses may be counted and deducted on the award and the reason for the award action or adjustment.
DateIncome CountedExpenses DeductedIVAPReason
08-01-2013$6,000$5,000$1,000
  • Entitlement begins on July 1, 2013.
  • Deduct the $2,000 last illness expenses paid before death plus the $3,000 burial expenses paid in the calendar year after the year of death for the initial year.
11-01-2013$10,000$9,000$1,000
  • One-time income of $4,000 is received in October 2013.
  • Deduct the $4,000 burial expenses paid in the calendar year after the year of death for the 12-month period beginning November 1, 2013.
08-01-2014$10,000$4,000$6,000Remove the $5,000 deduction of final expenses allowed for the initial year.
11-01-2014$6,000$0$6,000
  • Remove the $4,000 one-time income.
  • Remove the $4,000 deduction of final expenses paid in 2014.
Note: There may be several ways to count final expenses paid during the calendar year following the year of death. Per M21-1, Part IX, Subpart iii, 1.K.2.a, use the method that is most advantageous to the claimant.

IX.iii.1.K.2.h. Final Expenses Paid From Joint Accounts

A question may arise as to whether final expenses were paid by the deceased person or the claimant. If the evidence establishes that payment was made from the claimant’s separate funds or from a joint account with the claimant and another person, consider the expenses to have been paid by the claimant. However, do not allow any expenses as final expenses if they have already formed the basis of a medical expense deduction on the Veteran’s record.Example:
  • A Veteran died on October 14, 2013.
  • VA receives the surviving spouse’s Survivors Pension claim on November 3, 2013.
  • The surviving spouse submits evidence that the Veteran’s burial expenses were paid in advance by regular payments made over a period of time, extending from January 2011 through May 2013.
  • The payments in question were made from a joint checking account owned by the Veteran and the surviving spouse.
Result: The entire amount paid may be deducted from the surviving spouse’s IVAP for the initial year period.Reference: For more information on the initial year period, see M21-1, Part IX, Subpart iii, 1.E.7.

IX.iii.1.K.2.i. Reimbursed Final Expenses

If a final expense deduction is allowed, and the beneficiary subsequently receives reimbursement for some or all expenses, recalculate IVAP for the period over which the deduction was allowed to remove those expenses for which reimbursement was received.

3. Educational Expense Deductions


Introduction

This topic contains information on educational expense deductions, including
  • general information on education expense deductions
  • transportation expenses, and
  • period of deduction.

Change Date

June 6, 2019

IX.iii.1.K.3.a. General Information on Education Expense Deductions

Allow a deduction for the unreimbursed expenses for a Veteran or surviving spouse pursuing a course of education or vocational rehabilitation, per 38 CFR 3.272(i). Deductible expenses include amounts paid for
  • tuition
  • fees
  • books, and
  • necessary materials.
Note: There is no requirement that the course of education or vocational rehabilitation be approved for VA educational benefits.

IX.iii.1.K.3.b. Transportation Expenses

Allow unusual transportation expenses only if the Veteran or surviving spouse is rated in need of A&A.If the Veteran or surviving spouse is rated in need of A&A, allow transportation expenses that
  • are related to school attendance, and
  • exceed the reasonable amounts that would be incurred by a nondisabled person.
Note: The entire expense is deductible, not just the portion that exceeds the amount incurred by a non-disabled person.

IX.iii.1.K.3.c. Period of Deduction

Deduct educational expenses for the initial year or calendar year during which they were paid.When the initial year overlaps the first calendar year, deduct the higher amount of educational expenses during the overlapping period.Enter educational expenses in the EDUCATION EXPENSE field on the FINANCIAL screen.

4. Child’s Income Deductions


Introduction

This topic contains information on a child’s income deductions, including
  • deduction from child’s earned income
  • deducting a child’s income
  • child’s postsecondary education expenses, and
  • deducting a child’s postsecondary education expenses.

Change Date

June 6, 2019

IX.iii.1.K.4.a. Deduction From Child’s Earned Income

Under 38 CFR 3.272(j)(1), a child’s earned income is countable only to the extent that it exceeds an amount equal to the lowest amount of gross income for which a single person must file a Federal income tax return.This amount is adjusted each year by the Internal Revenue Service based on changes in the Consumer Price Index. The current amount of the exclusion can be found in the pension rate tables.This deduction applies regardless of whether the child is the person entitled or a dependent on a Veteran’s or surviving spouse’s award.

IX.iii.1.K.4.b. Deducting a Child’s Income

Enter the gross income of a child in the WAGES ANNUAL field on the FINANCIAL screen. The system automatically calculates the deduction and arrives at the child’s countable earnings.

IX.iii.1.K.4.c. Child’s Postsecondary Education Expenses

A child’s postsecondary education expense deduction applies only when a child has earned income in excess of the amount deducted under 38 CFR 3.272(j)(1). The educational expense deduction may not exceed the net amount of the child’s earnings after the child’s earned income deduction.The postsecondary educational expense deduction applies
  • only to postsecondary (beyond the high school level) educational or vocational training programs, and
  • regardless of whether the child is the person entitled or a dependent on a Veteran’s or surviving spouse’s award.
Note: Do not deduct amounts paid from scholarships and grants since scholarships and grants are not countable income for pension purposes unless they exceed education expenses.Reference: For more information on income exclusions, see M21-1, Part IX, Subpart iii, 1.I.3.

IX.iii.1.K.4.d. Deducting a Child’s Postsecondary Education Expenses

Deduct expenses for tuition, fees, books, and necessary materials.Enter amounts to be deducted under this provision in the CHILD'S EDUCATION EXPENSE EXCLUSION field on the FINANCIAL screen.

5. Hardship Deductions From a Child’s Income


Introduction

This topic contains information on hardship deductions from a child’s income, including
  • general information on hardship deductions from a child’s income
  • considering hardship deductions from a child’s income
  • elements of a hardship determination
  • reasonable family maintenance expenses
  • how hardship must be claimed
  • medical and education expenses as family expenses
  • medical expenses for the hardship exclusion
  • example of medical expenses for the hardship exclusion
  • educational expenses
  • example of educational expenses
  • making initial hardship determinations
  • award entries when no apportionment is involved
  • apportioned cases when IVAP does not exceed maximum annual pension rate (MAPR)
  • example of apportioned cases when IVAP does not exceed MAPR
  • apportioned cases when IVAP exceeds MAPR
  • effective dates for the hardship exclusion
  • adjusting for changes in the level of family expenses
  • example of adjusting for changes in the level of family expenses
  • verifying family expenses, and
  • MAPR changes and the hardship exclusion.

Change Date

June 6, 2019

IX.iii.1.K.5.a. General Information on Hardship Deductions From a Child’s Income

Under 38 CFR 3.23(d)(4), a Veteran’s annual income includes the income of each child of the Veteran to the extent that the child’s income is available to or for the Veteran unless, in the judgment of VA, it would work a hardship on the Veteran to count the child’s income.38 CFR 3.272(m) provides for a specific hardship deduction from child income. The hardship deduction applies only to Veteran and surviving spouse claimants. It does not apply to surviving children claiming pension in their own right.Note: 38 CFR 3.23(d)(5) contains similar language with respect to surviving spouse claimants.

IX.iii.1.K.5.b. Considering Hardship Deductions From a Child’s Income

Do not consider hardship deductions from children’s income without first determining that the child’s income
  • is available to the Veteran or surviving spouse, and
  • cannot be excluded under the
Consider the hardship deduction only if a child still has countable income afterReferences: For more information on deductions
  • for educational expenses, see M21-1, Part IX, Subpart iii, 1.K.3, and
  • from a child’s earned income, see M21-1, Part IX, Subpart iii, 1.K.4.a.

IX.iii.1.K.5.c. Elements of a Hardship Determination

Hardship exists if annual expenses necessary for reasonable family maintenance exceed the sum of countable annual income, plus pension entitlement.To make a hardship determination compare the sums of
  • annual expenses necessary for reasonable family maintenance, and
  • IVAP plus pension entitlement before applying the hardship exclusion.
Reference: For information on the hardship exclusion for a child’s income, see 38 CFR 3.23(d)(6).

IX.iii.1.K.5.d. Reasonable Family Maintenance Expenses

Annual expenses necessary for reasonable family maintenance include expenses for basic necessities, such as food, clothing, shelter, and other expenses, determined on a case-by-case basis, which are necessary to support a reasonable quality of life.Exclude expenditures for items that are not necessary to support a pensioner’s reasonable quality of life, such as luxuries, gambling, and investments. In addition, exclude expenditures used to calculate the claimant’s IVAP.Whether a particular expenditure is necessary to support a pensioner’s reasonable quality of life is a judgment call for the claims processor.Reference: For more information on excluding expenditures used to calculate IVAP, see M21-1, Part IX, Subpart iii, 1.K.5.f.

IX.iii.1.K.5.e. How Hardship Must Be Claimed

The claimant must allege that it would be a hardship to count a child’s income before hardship is placed in issue. Although the claimant does not have to use the word “hardship,” development should be initiated only if there is a clear indication that hardship is being claimed.Use VA Form 21P-0571, Application for Exclusion of Children’s Income, to develop hardship claims.Note: Annual pension entitlement (which is added to IVAP to make a child hardship determination) does not necessarily equal 12 times the claimant’s monthly rate because monthly payments are rounded down to even dollar amounts under 38 CFR 3.29(b).

IX.iii.1.K.5.f. Medical and Education Expenses as Family Expenses

Under 38 CFR 3.272(m), annual expenses necessary for reasonable family maintenance (family expenses) may not include any expenses which were considered in determining the Veteran or surviving spouse’s IVAP.This means that medical or educational expenses that were deducted from gross income in arriving at IVAP cannot be considered family expenses for purposes of the hardship exclusion. The same expenses cannot be deducted twice.However, medical or educational expenses that could not be deducted from gross income in arriving at IVAP may be included in the calculation of expenses necessary for reasonable family maintenance.

IX.iii.1.K.5.g. Medical Expenses for the Hardship Exclusion

Normally, the only medical expenses which qualify as family expenses are those which cannot be deducted under 38 CFR 3.272(g) because they are below 5 percent of the applicable maximum annual pension rate (MAPR).If the claimant’s total medical expenses are
  • above the 5-percent threshold, then only the amount below the threshold can be added to family expenses for hardship exclusion purposes, or
  • below the 5-percent threshold, then all the medical expenses can be family expenses.

IX.iii.1.K.5.h. Example: Medical Expenses for the Hardship Exclusion

Example: A Veteran with a running award reports total family income. The Veteran’s only established dependent is a child. The child has Social Security income of $9,000 and the Veteran has income of $2,000. The Veteran reports unreimbursed medical expenses of $400. The Veteran claims that it would cause a hardship to count the child’s income. The Veteran reports family expenses of $18,496. The $18,496 includes the $400 in medical expenses.Result: Treat the $400 as a family expense since the 5-percent medical expense threshold for a Veteran with one dependent is $842 effective December 1, 2014. By treating the $400 as a family expense, family IVAP can be reduced.Calculation: The table below outlines the calculation for determining the IVAP after applying the hardship exclusion.
StepCalculationDescription
1$2,000+$9,000$11,000Veteran’s incomeChild's IncomeIVAP before applying hardship exclusion
2$11,000+$5,851$16,851IVAP before applying hardship exclusionVA pensionIVAP plus pension entitlement
3$18,496-$16,851$1,645Family expensesIVAP plus pension entitlementHardship exclusion
4$9,000-$1,645$7,355Child’s incomeHardship exclusionChild's income minus the hardship exclusion
5$2,000+$7,355$9,355Veteran’s incomeChild's income minus the hardship exclusionIVAP after applying hardship exclusion

IX.iii.1.K.5.i. Educational Expenses

A child’s postsecondary educational expenses may be deductible from earned income under 38 CFR 3.272(j)(2).However, in many instances, a child’s educational expenses will not qualify for exclusion under 38 CFR 3.272(j)(2) because
  • they do not relate to postsecondary education, or
  • the child who incurred the expenses did not have earned income.
Any educational expenses which are deductible under 38 CFR 3.272(j)(2) should be deducted under that provision. If educational expenses cannot be deducted under 38 CFR 3.272(j)(2), consider them as family expenses.

IX.iii.1.K.5.j. Example: Educational Expenses

Example: The Veteran has two children, Rob and Sarah. Rob is a college student with tuition and book expenses of $1,200 per year. Rob has no income. Sarah has no school expenses but earns $12,000 per year; therefore, Sarah has countable income effective December 1, 2014, even after applying the child’s earned income exclusion in 38 CFR 3.272(j)(1). Rob has educational expenses that are potentially deductible under 38 CFR 3.272(j)(2), but Rob has no income.Result: Rob’s educational expenses cannot be offset against Sarah’s income. However, Rob’s educational expenses can be treated as family expenses if Sarah’s income is available to the Veteran and the Veteran claims that it would cause a hardship to count it.

IX.iii.1.K.5.k. Making Initial Hardship Determinations

Use the table below when making initial hardship determinations.
If …Then …
the sum of IVAP plus pension entitlement equals or exceeds claimed family expensesdo not permit a hardship deduction because hardship does not exist.
the claimed family expenses exceed the sum of IVAP plus pension entitlement
  • develop for a breakdown of claimed expenses (if not already of record), and
  • determine if the claimed expenses are necessary for reasonable family maintenance.
    • An itemization of family expenses is always required for an initial hardship determination.If all claimed family expenses are necessary for reasonable family maintenance, VA will deduct the amount by which the claimed expenses exceed the sum of countable annual income plus pension entitlement.
  • the claimed expenses exceed the sum of IVAP plus pension entitlement, and
  • it is decided that some expenses are not necessary for reasonable family maintenance
determine if the expenses that are necessary for reasonable family maintenance are adequate to offset all children’s income.No further development is necessary if this criterion is met.
  • the claimed expenses exceed the sum of IVAP and pension entitlement
  • it is determined that some expenses are not necessary for reasonable family maintenance, and
  • the disallowed expenses are needed to offset all of children’s income
prepare an administrative decision for approval by a senior claims processor. The issue is whether or not the expenses reported by the claimant are necessary for reasonable family maintenance.Ensure that the decision indicates which claimed expenses are not necessary for reasonable family maintenance and the reason why. In the discussion portion of the administrative decision, cite the definition of expenses necessary for reasonable family maintenance in 38 CFR 3.23(d)(6).

IX.iii.1.K.5.l. Award Entries When No Apportionment Is Involved

When the level of expenses necessary for reasonable family maintenance has been determined, enter the total allowed expenses in the HARDSHIP EXCLUSION field on the FINANCIAL screen.The system calculates the amount of the hardship deduction and reduces countable child income by that amount.

IX.iii.1.K.5.m. Apportioned Cases When IVAP Does Not Exceed MAPR

If there is an apportionment and IVAP (without consideration of the hardship exclusion) does not exceed the “dependency this award” MAPR
  • adjust the entry in the HARDSHIP EXCLUSION field on the FINANCIAL screen so that the system can calculate the correct child hardship deduction. Adjust the entry by
    • subtracting the “dependency this award” MAPR from the “total dependency” MAPR
    • subtracting the difference from total allowed family expenses, and
    • entering the result in the HARDSHIP EXCLUSION field on the FINANCIAL screen, and
  • send a locally generated letter.

IX.iii.1.K.5.n. Example: Apportioned Cases When IVAP Does Not Exceed MAPR

Example: A Veteran has a spouse and two children. One child is out-of-custody and is receiving an apportionment. IVAP (without consideration of the hardship deduction) does not exceed the “dependency this award” MAPR.The claims processor determines that total allowed family expenses are $16,000. The “total dependency” MAPR for a Veteran with three dependents effective December 1, 2014, is $21,247. The “dependency this award” MAPR for a Veteran with two dependents effective December 1, 2014, is $19,049.Calculation: The table below outlines the calculation for determining the hardship expenses.
StepCalculationDescription
1$21,247-$19,049$2,198“Total dependency” MAPR (three dependents)"Dependency this award" MAPR (two dependents)Difference
2$16,000-$2,198$13,802Family expensesDifference from Step 1 aboveHardship expenses
Result: Enter $13,802 in the HARDSHIP EXCLUSION field on the FINANCIAL screen. The system then calculates the correct child hardship deduction.

IX.iii.1.K.5.o. Apportioned Cases When IVAP Exceeds MAPR

If there is an apportionment and IVAP (without consideration of the hardship exclusion) exceeds the “dependency this award” MAPR, enter the total allowed family expenses in the HARDSHIP EXCLUSION field on the FINANCIAL screen.There is no need to adjust the HARDSHIP EXCLUSION entry if IVAP exceeds the “dependency this award” MAPR.

IX.iii.1.K.5.p. Effective Dates for the Hardship Exclusion

Apply 38 CFR 3.660(b) and 38 CFR 3.31 to determine the effective date of an increased rate of pension based on a change in child income by
  • recalculating IVAP for the calendar year or initial year, and
  • making the adjustment effective the beginning of that calendar year or initial year.
Example: A Veteran’s only dependent is a child. The Veteran’s current reporting period is January 1, 2014, through December 31, 2014. On November 11, 2014, a claim for the hardship exclusion is received from the Veteran. Development reveals that the Veteran is entitled to have $1,000 excluded from the child’s income. No other adjustments are required based on a review of the claims folder.During January 2014, the Veteran received pension of $976 per month based on IVAP of $5,136. After applying the hardship exclusion, IVAP for the period January 1, 2014, through December 31, 2014, goes down to $4,136.Result: Continue the $976 per month rate for January and award $1059 per month effective February 1, 2014, per 38 CFR 3.31.

IX.iii.1.K.5.q. Adjusting for Changes in the Level of Family Expenses

If a claimant reports an increase in family expenses that will result in an increase in the amount of the hardship exclusion, determine if additional development is necessary to justify the increase in family expenses. Once an initial hardship exclusion has been allowed, the amount of the exclusion may be increased without a new itemization of expenses if the reported increase in family expenses appears reasonable.If it is determined that no additional development is required or if development establishes that the increase is warranted, make the adjustment effective the beginning of the next calendar year reporting period, subject to 38 CFR 3.31.Use the table below to determine how to make the adjustment for changes in the level of family expenses.
If the report shows …Then …
a change in family expenses (up or
down) which will not affect the amount
of the hardship exclusion		update the HARDSHIP EXCLUSION field on the FINANCIAL screen.
an expected reduction in family
expenses which will cause a reduction
in the amount of the hardship exclusion
for the next year		make the adjustment effective the beginning of the next calendar year.

IX.iii.1.K.5.r. Example: Adjusting for Changes in the Level of Family Expenses

Example: Family maintenance expenses of $16,000 are established for a Veteran. In April 2015, a Veteran reports additional expenses expected for 2016.The increased expenses, if allowed, would result in an increased child hardship deduction. A claims processor reviews the file and determines if the level of claimed family expenses appears reasonable without further development.Result: Adjust the award effective January 1, 2016, (or February 1, 2016, due to 38 CFR 3.31) to allow the higher exclusion.

IX.iii.1.K.5.s. Verifying Family Expenses

Do not attempt to verify family expenses that have already been allowed. However, if a claimant reports a change in family expenses for a retroactive period and the change will affect the rate of pension payable, adjust the award, subject to 38 CFR 3.31 and 38 CFR 3.660(b)(1), effective the later of the two following dates:
  • the beginning of the reporting period during which the change occurred, or
  • the date the hardship exclusion was first allowed on the award.

IX.iii.1.K.5.t. MAPR Changes and the Hardship Exclusion

When there is an increase in the MAPR, for example, as the result of a cost-of-living adjustment (COLA), the sum of the IVAP plus pension entitlement also increases. This means that the amount of the child hardship exclusion should decrease, assuming no change in the level of family expenses.If this causes a reduction in the rate of VA pension, adjust the award effective the first of the month after the date of the COLA/MAPR increase.

6. Specific Deductions for Gross Business Income and Disability or Death Expenses


Introduction

This topic contains information on specific deductions for gross business income and disability or death expenses, including
  • gross business income deductions
  • disability/death expense deductions
  • application of disability/death expense deductions
  • developing for disability/death expense deductions, and
  • FINANCIAL screen entries for disability/death expense deductions.

Change Date

September 6, 2022

IX.iii.1.K.6.a. Gross Business Income Deductions

If a claimant has income from rentals or operation of a business, determine countable income by deducting reasonable operating expenses from gross income, per 38 CFR 3.271(c).Enter the net profit from rentals or operation of a business in the BUSINESS ANNUAL field on the FINANCIAL screen.Specific Deductions:
  • Amounts expended on supplies that are consumed in the course of the business are deductible.
  • If rental or business property is mortgaged, payments of interest on the mortgage are deductible from business or rental income; however, payments of principal are not deductible.
Specific Items Not Deductible:
  • Do not offset a loss sustained in operation of a business enterprise against income derived from other sources.
  • Depreciation is not a deductible expense.
  • The cost of purchase of a capital asset, such as a piece of durable equipment, is not a deductible expense. The theory is that the capital asset will retain its value except to the extent it is diminished through depreciation and depreciation is not deductible.

IX.iii.1.K.6.b. Disability/Death Expense Deductions

If a claimant is awarded recovery or settlement compensation for injury, illness or death, the expenses incurred in securing the award, such as attorney fees and medical bills, are deductible directly from the total income received as a disability/death expense deduction.Specific Deductions:
  • Awards from Social Security Administration, Office of Workers’ Compensation, Department of Labor, and the Railroad Retirement Board are subject to this deduction as are awards pursuant to any workers’ compensation or employers’ liability statute.
  • This deduction also applies to private lawsuits and settlements. The amount received is countable income, but the claimant can deduct an attorney’s fees, medical expenses, and other expenses related to the recovery.
Rationale: The underlying theory is that the claimant should be charged income only for the recovery or settlement received that is above amounts that had to be expended in securing the award.

IX.iii.1.K.6.c. Application of Disability/Death Expense Deductions

Medical or legal expenses paid prior to VA pension’s effective date can be deducted from the claimant’s income per 38 CFR 3.271(g), provided the expenses are directly related to the incident or the recovery of an award or settlement.This disability/death expense deduction is applied only once. After this one-time (nonrecurring) deduction, any ongoing medical expenses are deductible only as medical expense deductions, per 38 CFR 3.272(g).

IX.iii.1.K.6.d. Developing for Disability/Death Expense Deductions

Use VA Form 21P-8416b, Report of Medical, Legal, and Other Expenses Incident to Recovery for Injury or Death, to develop for unreimbursed amounts the claimant has actually paid in connection with a recovery or settlement award.Do not deduct any amounts that the claimant has not actually been paid.

IX.iii.1.K.6.e. Financial Screen Entries for Disability/Death Expense Deductions

Enter the following information on the FINANCIAL screen:
  • the gross amount of the recovery or settlement award in the DISABILITY/DEATH CLAIM AWARD ANNUAL field, and
  • deductible medical or legal expenses incurred in connection with a recovery or settlement award in the DISABILITY/DEATH CLAIM EXPENSE EXCLUSION field.
Note: The amount deducted for medical or legal expenses cannot exceed the amount of the recovery or settlement award. The system calculates net countable income.

Source: VA M21-1 Adjudication Procedures Manual, M21-1, Part IX, Subpart iii, Chapter 1, Section K (U.S. government work, reproduced for reference). Browse all sections →