Are Your Benefits Taxable?
A recent Forbes article highlighted the “curious and confusing” nature of the law regarding the taxation of Social Security Disability (SSD) benefits. The words “curious and confusing” weren’t unnecessary commentary by the author; rather, they came directly from a recent decision by the United States Tax Court involving the taxation of SSD benefits.
Public and Private Disability Insurance Benefits
The facts of the case were as follows. Cheryl English became disabled and unable to work sometime before 2007. She took two logical steps. She filed for SSD benefits and alerted Hartford Insurance, the company with whom she had a long-term disability plan. She began receiving her private benefits quickly but did not begin receiving Social Security Disability benefits until 2010.
As a reminder, she had been unable to work since 2007. Without the private insurance plan, she would have gone three years without income. As a remedial measure, the Social Security office awarded her $49,610 lump sum for the years that she was waiting for the agency’s determination. Under her policy with Hartford, she was required to repay $48,144 of the benefits she had receive from the company (under a clause requiring repayment if SSD benefits were received). She repaid the amount and thus netted $1,466 in 2010.
Investigating Tax Obligations
English, unsure of what her tax obligations were in 2010, sought the advice of two certified public accountants (CPAs) who told her the Social Security benefits were not taxable and she did not have to report them. On that advice, she didn’t.
IRS Spells Trouble
Unfortunately, the IRS disagreed with the CPAs. The IRS claimed she owed taxes on the amount she received from the Social Security Administration, she could not offset the amount received from Social Security by the amount she had to pay back to Hartford, and that she owed a $2,112 “accuracy penalty” for her mistake. Under current laws, the Tax Court largely agreed with the IRS.
The court considered a law that allows, for tax purposes, a Social Security benefit recipient to offset the amount received in a given year by any amount repaid to the Social Security Administration (SSA) for previously received benefits. However, the law only applies to amounts received under the Social Security Act, not those being repaid to a private company. It’s a little tricky but it means that if the benefits received from Hartford were from a public agency (the SSA) not a private company, English would not have been required to pay taxes.
It is difficult to justify such a result and the court acknowledged that it was unfair to English. However, it felt compelled to follow the letter of the law and that under the law, she was required to pay taxes on the benefit. Congress, not the courts, needs to fix the problem. The only upside was that the court found that English was not required to pay the penalty because her reliance on the CPAs’ advice was in good faith. A small victory in the context of the rest of the case. The full decision can be found here.
Social Security Disability benefits can be a complicated area of law. The attorneys at The Rocky Mountain Disability Law Group can help.