A taxpayer inadvertently forfeited her right to exclude workers’ compensation payments from taxable income by receiving Social Security benefits, the U.S. Tax Court has ruled in affirming a $5,000 deficiency assessment.
Section 104(a)(1) of the Internal Revenue Code generally excludes from gross income workers’ compensation received by the taxpayer.
However, Social Security benefits, including Social Security disability benefits, may be includable in a taxpayer’s gross income. Moreover, Â§86(d)(3) includes workers’ compensation payments in the definition of taxable Social Security insofar as they offset Social Security payments.
In this case, the taxpayer began receiving workers’ compensation benefits for two work-related injuries in 1999.
Several years later, the taxpayer’s attorney advised her to apply for Social Security disability benefits. The Social Security Administration eventually approved her claim and for the 2007 tax year issued a benefits statement indicating that she received $36,000 in Social Security payments.
Even though the statement included a $31,000 offset for the taxpayer’s workers’ compensation payments, she failed to report any Social Security benefits as income.
But the court concluded that the $31,000 offset for workers’ compensation was taxable.
“We acknowledge that [the taxpayer] applied for Social Security benefits on the advice of counsel. We also acknowledge that if [she] had not applied for Social Security benefits, then her workers’ compensation benefits would not have been subject to federal income tax. Under the circumstances we can appreciate [the taxpayer's] dismay. â€¦
“Nevertheless, â€¦ we are duty-bound to apply the law as written by Congress to the facts as they occurred and not as they might have occurred. Because [the taxpayer's] Social Security benefits were reduced by the amount of workers’ compensation benefits received, that offset amount is treated as a Social Security benefit and is, therefore, taxable,” the court said.
U.S. Tax Court. Sherar v. Commissioner, No. 19548-09S. April 6, 2011. Lawyers USA No. 993-2812.