Tax Trap for Workers' Comp Recipients Applying for Disability

June 13,2016
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Are you receiving workers’ compensation benefits?  Have you been told that you may be eligible to receive disability payments from the Social Security Administration in addition to your workers’ comp?  Before you run down to your local SSA office and fill out an application, our White Plains disability lawyers want to warn you about a surprising gotcha hidden in Social Security and tax law.

The Unbelievable but True Case of John Thompson vs. The IRS

John Thompson, Jr. was injured while working as a postal worker.  As a result of the injury, he was temporarily unable to work.  He filed for and received workers’ compensation benefits that were paid monthly.

Thompson learned that he might qualify for supplemental security income or SSI so he went to a local SSA office and filed an application.  About six weeks later, Thompson received notice that he did not qualify for SSI because he had too much income.  Two months later Thompson received a second notice from the SSA.  This time the notice said that he did qualify for SSI and that he would receive benefits.

The notice also informed Thompson about the workers’ compensation offset rule. Under this rule, if someone receives workers’ compensation (or other public disability benefits), and Social Security or SSI disability benefits, the total amount of these benefits can’t exceed 80 percent of the person’s average current earnings before he or she became disabled. Thus, if the money Thompson received from both SSI and Workers’ Compensation totaled more than 80% of his average current monthly earnings, his SSI check would be reduced accordingly.

The Social Security Administration calculated that 80% of Thompson’s average current earnings equaled $3,457.60 per month.  Thompson was receiving $3,794.60 per month from workers’ compensation.  Since the amount of money that Thompson was receiving from workers’ compensation exceeded 80% of his average current earnings, SSA withheld 100% of his SSI benefits.  Thompson did not receive any money from the Social Security administration for SSI benefits.

The total SSI benefit that he was entitled to for 2011 was determined to be $35,905.00 but the full amount was withheld since his workers’ compensation payments, alone, were more than 80% of his average current earnings.  Although Thompson got no money from the SSA, he did get a 1099 indicating that his SSI benefit, which he never actually received, was $35,905.00.

Imagine Thompson’s disappointment!  First his SSI application is denied, he then gets notice that his application is granted and he has reason for a little celebration.  Next, he learns that even though his application was granted, he was not really going to get any money because he was paid too much by workers’ compensation.  To rub a little salt in the wound, SSA sends a 1099 showing what he could have received as a benefit!

At the end of the day, his efforts have lead to nothing.  He must be wondering why someone did not tell him about the workers’ compensation setoff when he filed his application!  Now what?  There is nothing to do but just accept it and go on, right?  Wrong!  Thompson’s journey through the confusing maze of government benefits has just begun!

Remember, Thompson did not receive any money for SSI benefits.  In his mind, no money means he has nothing to report to the IRS so he did not report the $35,905.00 shown on the 1099 from the SSA on his 2011 personal income tax return.  A copy of the 1099 from the SSA goes to the IRS.  Thompson’s tax return was flagged by the IRS and he received a notice of deficiency for not reporting the SSA income listed on the 1099.  Thompson figured that this was an error and disputed the deficiency by filing a petition in the Tax Court.  Yes, he had received a 1099 showing money for SSI benefits, but since he never actually got any money, this would be easy to get straightened out, right?  Wrong!

The Tax Court ruled that Thompson had been entitled to SSI benefits that totaled the amount indicated on the 1099 and since a portion of Social Security disability benefits are subject to income tax, he should have reported that amount on his tax return despite the fact that the offset due to his receipt of workers’ compensation benefits amounted to 100% of his benefit.

Thompson’s workers’ compensation benefits were not taxable.  Had he not filed for SSI, he would have had no obligation to report the money that he received and would have owed no tax.  His successful application for SSI transformed some of his otherwise tax-free workers’ compensation payments into taxable income.  The Tax Court’s opinion acknowledged that “if petitioners had not applied to SSA for SSI disability benefits, then petitioners would not find themselves in the situation they are in now.  Petitioners’ frustration is thus understandable, but our role is to apply the law as written.”  Thompson would have to pay taxes on money that he did not receive.

You can read the court’s opinion in the Thompson case here: https://www.ustaxcourt.gov/USTCDockInq/DocumentViewer.aspx?IndexID=6852123.

You can read more about how the workers’ compensation offset works here: https://www.ssa.gov/pubs/EN-05-10018.pdf

Are you receiving workers’ compensation benefits?  Should you consider filing for disability benefits?

Consider?  Yes!  But only with the advice of an attorney who has experience in Social Security disability cases.

The case of Thompson vs. The I.R.S illustrates that the laws regarding Social Security disability are complicated.  Decisions you make regarding applying for benefits will impact your life in ways that you may not be aware of.  The White Plains disability lawyers at the Hermann Law Group have many years of experience.  They know the pathway through the maze and can help you avoid the traps along the way.  Call the Hermann Law Group at 877-773-3030 to schedule your free case evaluation.