I am
spending more time talking about social security.
The clients
and I are aging. If it does not affect me, it affects them – and that affects
me.
Social
security has all manners of quirks.
For example,
say that one worked for an employer which does not pay into social security. There
are many - think teachers, who are covered instead by state plans. It is common
enough to mix and match employers over the course of a career, meaning that
some work may have been covered by social security and some was not. What does
this mean when it comes time to claim benefits?
Well, if you
are the employee in question, you are going to learn about the windfall
elimination provision (WEP), which is a haircut to one’s social security for this
very fact pattern.
What if this
instead is your spouse and you are claiming spousal benefits? Well, you are
going to learn about the “government pension offset,” which is the same fish but
wrapped in different paper.
What if you
are disabled?
Kristen
Ecret was about to find out.
She worked a
registered nurse until 2014, when she suffered an injury and became medically
disabled. She started receiving New York workers compensation benefits.
Oh, she also
applied for social security benefits in 2015.
In December
2017 (think about it) she heard back from the SSA. She was entitled to
benefits, and those benefits were retroactive to 2015.
Should be a
nice check.
In January
2018 she received a Form SSA-1099 for 14,392, meaning the SSA was reporting to
the IRS that she received benefits of $14,332 during 2017.
But there
was a bigger problem.
Kristen had
received nothing – zippo, nada, emptitadad – from SSA. The SSA explained that
her benefits had been hoovered by something called the “workers’ compensation
offset.”
She filed a
request for reconsideration of her benefits.
She got some
relief.
It’s a year
later and she received a Form SSA-1099 for 2018. It reported that she received
benefits of $71,918, of which $19,322 was attributable to 2018. The balance – $52,596
– was for retroactive benefits.
Except ….
Only $20,749
had been deposited to her bank account. Another $5,375 was paid to an attorney or
withheld as federal income tax. The difference ($45,794) was not paid on
account of the workers’ compensation offset.
Something
similar happened for 2019.
Let’s stay
with 2019.
Instead of
using the SSA-1099, Kristen reported taxable social security on her 2019 joint
income tax return of $5,202, which is 85% of $6,120, the only benefits she
received in cash.
I get it.
The IRS of
course caught it, as this is basic computer matching.
The IRS had
records of her “receiving” benefits of $55,428.
The difference?
Yep: the “workers’ compensation offset.”
There was
some chop in the water, as a portion of the benefits received in 2019 were for
years 2016 through 2018, and both sides agreed that portion was not taxable.
But that left $19,866 which the IRS went after with vigor.
The Court
walked us through the life, times and humor of the workers’ compensation offset,
including this little hummable ditty:
For purposes of
this section, if, by reason of section 224 of the Social Security Act [i.e., 42
U.S.C. § 424a] . . . 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."
Maybe the
Court will find a way ….
Section 86(d) compels us to
agree with respondent."
The “respondent”
is the IRS. No help here from the Court.
Applying the 85% inclusion ratio,
we conclude that petitioners for 2019 have taxable Social Security benefits of
$16,886, viz, 85% of the $19,866 in benefits that were attributable to 2019.
Because petitioners on their 2019 return reported only $5,202 in taxable Social
Security benefits, they must include an additional $11,684 of such benefits
($16,886 − $5,202) in their gross income."
Kristen
lost.
Oh, the IRS applied
an accuracy-related penalty, just to make it perfect.
We know that
tax law can be erratic, ungrounded, and nonsensical. But why did Congress years
ago change the tax Code to convert nontaxable disability income into taxable
social security income? Was there some great loophole here they felt compelled
to squash?
Our case
this time was Ecret v Commissioner, T.C. Memo 2024-23.
