Cross References
• Moore, T.C. Memo 2012-249, August 28, 2012

This is another in a long list of cases illustrating the fact that Social Security disability benefits are still taxable, even when reduced by nontaxable workers’ compensation. During the year in question, the taxpayer received Social Security disability benefits and state workers’ compensation benefits. The Social Security Administration reported to the IRS and the taxpayer benefits of $11,947.20, of which $5,844.00 was paid by check, $1,388.40 deducted for Medicare Part B premiums, and $4,714.80 as an offset for workers’ compensation.

The taxpayer filed a federal joint tax return reporting only $5,844 received in Social Security benefits. The IRS determined that the full $11,947.20 should have been reported, of which 85% is taxable. IRC section 86(d)(3) says in part: “if…any Social Security benefit is reduced by reason of the receipt of a benefit under a workmen’s compensation act, the term ‘Social Security benefit’ includes that portion of such benefit received under the workmen’s compensation act which equals such reduction.”

The taxpayer argued that including the amount of workers’ compensation benefits in their taxable Social Security disability benefits is unfair because workers’ compensation benefits are otherwise not taxable. The Court said the statute simply does not allow workers’ compensation benefits paid by a state that offsets Social Security benefits to be excluded from the taxable amount of Social Security benefits. The Court also cited a Committee report for the law which indicates that Congress specifically anticipated this result.