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BEWARE the TAXMAN: Social Security Disability and Workers Compensation

If you receive both Social Security Disability and workers compensation, you want to make sure your tax preparer helps you properly declare your Social Security Disability offset or you could be in for a hefty tax bill.

In Boston, a taxpayer has been assessed a $5,000 deficiency by the U.S. Tax Court because she mistakenly forfeited her right to excluding workers' compensation payments from her taxable income when receiving Social Security benefits.

Social Security Disability benefits are sometimes included as gross income and are taxable. Workers' compensation payments offset Social Security Payments.

The taxpayer from Boston received workers' compensation benefits in 1999. Her attorney advised her to apply for Social Security Disability benefits, and she was approved. In 2007, she was issued a benefits statement that showed she had received $36,000 in payments from Social Security Disability. The statement also included a $31,000 offset for the workers' compensation payments, she did not report the Social Security benefits as income.

The U.S. Tax Court concluded that the $31,000 workers' compensation offset was taxable as income. They indicated:

"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. Nevertheless, 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."

Make sure your tax preparer is well aware of the implications of receiving both Social Security Disability and workers' compensation so you aren't stuck with a hefty bill, too!

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