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Tax Court rules on Social Security disability benefits case
Here is a Tax Court case dealing with Social Security disability benefits with a result that you might find surprising.
Debra Clayton-Moore received both Social Security disability benefits and state worker’s compensation benefits. The state of Ohio paid her worker’s compensation benefits of $4,715. State worker’s compensation benefits are nontaxable.
She was also entitled to Social Security disability benefits in the amount of $11,947. Under the Social Security Act, these disability benefits are reduced by any state worker’s compensation benefits, so Social Security actually paid her $7,232.
At higher income levels, a portion of a person’s Social Security benefits is taxable. In Clayton-Moore’s situation, 85 percent of her Social Security benefits were included as taxable income.
The Social Security Administration reported that Clayton-Moore’s total benefits were $11,947, including the $4,715 offset for worker’s compensation. She argued that she should have to pay income tax only on 85 percent of the $7,232 actually paid by Social Security.
The Tax Court noted that the Internal Revenue Code specifically provides that, if any Social Security benefit is reduced because of a worker’s compensation benefit, the “Social Security benefit” includes the amount received under the worker’s compensation act, even though the state, and not the Social Security Administration, paid those benefits.
In Clayton-Moore’s situation, the result was that the government took about one-half of her Social Security payments as income taxes. (Ronald Moore and Debra J. Clayton-Moore v. Commissioner, TC Memo 2012-249, Aug. 28, 2012)
The technical information here is necessarily brief. No final conclusion on these topics should be drawn without further review and consultation. Please be advised that, based on current IRS rules and standards, the information contained herein is not intended to be used, nor can it be used, for the avoidance of any tax penalty assessed by the IRS.
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