Paying Taxes on $30K for $0 in Benefits

US tax code and the Social Security system are debatably two of the most complicated systems known to man. When you put them together, it’s a wonder anyone makes it out alive. Forbes recently wrote about one unlucky citizen who got caught in the middle of these two systems.

John Thompson Jr. worked for the California Postal Service and was injured in 2009. His injuries were so severe that he could not continue to work and needed several operations to recover. After the injury, Thompson applied for worker’s compensation benefits. He was approved and started receiving benefits in July of 2009.

A few years later Thompson also applied for both Social Security Disability Insurance and Supplemental Security Income in February of 2011. Though the Supplemental Security Income claim was denied because he earned too much to qualify for benefits, his Social Security Disability Insurance claim was approved a few months later.

The catch was that worker’s comp and social security benefits can only add up to 80% of the beneficiary’s average monthly earnings prior to the injury. Eighty percent of Thompson’s pre-injury earnings was $3,457.60 per month and he was already getting $3,794.60 from worker’s comp.

So even though he was approved, Thompson wouldn’t actually be getting any monthly benefit payments from the SSA.

When the 2011 tax season rolled around the SSA sent Thompson and the IRS a 1099 form claiming the SSA paid Thompson $35,905 in worker’s comp offset benefits. The problem was that Thompson failed to claim these earnings on his 1040 thinking it was all from worker’s comp, which isn’t taxable.

Thompson tried to fight the IRS in court but eventually lost. When it was all said and done, Thompson owed back taxes on $30,519.

This situation isn’t as rare as you would think. People get confused and trapped by the SSA’s complicated rules and regulations all the time. At Jan Dils Attorneys at Law we pride ourselves on always explaining the full implications of benefits to our clients and helping them avoid common mistakes like this.