The interaction of complex laws and regulation can sometimes create unfortunate results for individuals. A case involving a postal service employee demonstrates how a seemingly innocent application for Social Security benefits ended up causing the man's workers' compensation benefit to become taxable despite the fact that he received no benefit payments from Social Security.
After his work-related injury, he underwent several surgeries and was out of work from 2009 to 2013. During this period, he applied for disability benefits through Social Security. At first, he was denied, because he earned too much. A few months later, SSA corrected their denial but explained that his disability benefit would be reduced by the amount of his workers' compensation benefits that were paid.
The offset reduced his disability benefits to zero, but because he had been "awarded" benefits by SSA, the agency also issued an SSA-1099, which indicated that 85 percent of his workers' compensation benefit was now taxable.
The man ignored this form and was later found by the IRS to have a tax delinquency. The Tax Court explained that this was not an accident or the IRS acting maliciously, but how Congress designed the tax law to function in this situation.
You may think this is grossly unfair, and that someone should have warned him not to apply for this type of Social Security benefit. It is unfair. However, this situation has been in place since 1983, when Congress made these benefits taxable even if SSA paid none of the benefits due to offsets by the payment of workers' compensation benefits that would otherwise not be taxable.
However, there's another catch. If you get Social Security disability benefits you get Medicare, at any age, after you have received 24 months of benefits including back pay. If someone doesn't file for SSD because of worker's comp could cause a tax problem, he or she can't get Medicare until age 65. If this person loses health insurance from their job, they really need Medicare. Which is worse - paying the tax or going without medical coverage?
There are thousands of sections of the law that control elements of Social Security disability benefits and those sections interact with many other laws. The author of the Forbes story notes that calls to SSA may not always result in correct or optimal advice from low-paid and potentially inexperienced workers.
That is unfortunate, as is the offset of untaxable workers' compensation benefits with taxable disability benefits. The fault for both, however, lies not with SSA or the IRS, but Congress.
Source: forbes.com, "How A Disabled Worker Got $0 Social Security, But Owed Taxes On $30,519 In Benefits," Janet Novack, May 13, 2016