Tax Eligibility and Disability Payment

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Table of Contents

Introduction
Analysis
Conclusion
References

Introduction

Aubrey Brown worked for the state as an army officer who participated in the Vietnam War. While working there, he found himself exposed to Agent Orange. As a result of that exposure, Aubrey got affected with lung cancer. He is now not able to continue working. He is now entitled to the Social Security disability payments and has since received $ 12,000. Aubrey Brown thinks that if he had been okay, he would not be eligible for this money. Therefore, this amount should not be part of the gross taxable income. Another reason is that the injury he suffers occurred during his service in the army as an employee of the state. He has to be fully entitled to compensation.

The Issue

Should Aubrey Brown apply for Taxability exemption for his social security disability payment of $ 12,000?

Analysis

For this issue, there are a couple of rules of the law that refer to several provisions. The specific law that deals with Taxable and Nontaxable Income is the Publication 525 of the Internal Revenue Services. It states that:

Military and Government Disability Pensions

Certain military and government disability pensions are not taxable.

Service-connected disability: You may be able to exclude from income amounts you receive as a pension, annuity, or similar allowance for personal injury or sickness resulting from active service in one of the following government services.

The armed forces of any country.
The National Oceanic and Atmospheric Administration.
The Public Health Service.
The Foreign Service.

Conditions for exclusion: Do not include the disability payments in your income if any of the following conditions apply.

You were entitled to receive a disability payment before September 25, 1975.
You were a member of a listed government service or its reserve component or were under a binding written commitment to become a member, on September 24, 1975.
You receive the disability payments for a combat-related injury. It is a personal injury or sickness that:

1. Results directly from armed conflict,
2. Takes place while you are engaged in extra-hazardous service,
3. It takes place under conditions simulating war, including training exercises such as maneuvers, or
4. Is caused by an instrumentality of war.

You would be entitled to receive disability compensation from the Department of Veterans Affairs (VA) if you filed an application for it. Your exclusion under this condition is equal to the amount you would be entitled to receive from the VA (Internal Revenue Service, n.d).

From this law, it is evident that it covers the military personnel. Aubrey was in the military War of Vietnam. His injury is combat-related, and the war was in an extra-hazardous service. The lung cancer results from the Agent Orange exposure, which is an instrumentality of war (Bertoni, 2010). Publication 525 encompasses Aubrey, and he is entitled to apply for the specific tax exemption on his Social Securities income.

Fig.1 Calculation of Increase in Living Expenses.
	Actual Income	*Taxable Income ()**	Net Income
Social Security Disability	$ 12,000.00	$ 0.00	$ 12,000.00
Medical	$ 0.00	$ 0.00	$ 0.00
Total	$ 12,000.00	$ 0.00	$ 12,000.00
Reimbursement			$ 0.00
Amount of payment for tax exemption			$ 12,000.00 (*)

There are other places in the law that describe the Disability Pensions. If a person retires because of disability, it is important that he or she records any taxable disability payments as wages until one reaches the minimum retirement age (Bertoni, 2010). Publication 524 enumerates the conditions necessary for entitlement of taxability exemptions and exclusions. One can receive a tax credit if one is utterly unable during retirement. The publication 524 titled Credit for the Elderly or the Disabled deals with such tax. However, this law does not apply to Aubrey. He left active employment because of the lung cancer condition (Miller & Maine, 2010).

Amounts that are owed paid to an individual as worker’s compensation for an occupational sickness or injury are fully exempt from tax. But they must be paid under the compensation act or statute in that nature. It does not apply to the retirement plan benefits which rely on age, length of service, and previous contribution (Cortez, 2012).

There is another aspect of Aubrey’s condition. It is about his eligibility to receive the social services disability income. The five questions that require attention include whether Aubrey is currently participating in the substantial gainful activity. It seems that Aubrey’s only income is from this social security. The only job he did was in the army. The threshold for SGA is $1,090.

The second question is if Aubrey’s condition interferes greatly with his ability to carry out essential task activities (Miller & Maine, 2010). It is true that Aubrey may not be able to continue with his activities in the Army because of his condition. Cancer in the lungs may significantly affect his ability to breathe, and the army field work would require him to be physically fit. He is also automatically qualifying as a physically challenged person since his lungs cannot function properly. The fourth criterion is if Aubrey can do the work he did before. He may not qualify on the fifth point which is if he cannot do any other work. But four out of five criteria qualify him to receive the benefits. Therefore, Aubrey has a right to claim for tax exemption (Internal Revenue Service, n.d).

Approximately ¾ of Social Security Disability recipients do not pay federal income taxes on their Social Security Disability payments (Cortez, 2012). It is the level of income that determines if someone is to pay the taxes. As from the year 2011, a person does not have to pay federal income taxes if his or her taxable income is less than $ 25,000 for an individual and $32,000 for a married couple filing jointly. The case for Aubrey is also resulting from physical injury and not emotional distress which does not qualify for tax exemption (Bertoni, 2010).

It is also upon Aubrey to confirm with an accountant or tax preparer any other exceptions that may affect him. The Court case of Helvering vs. Davis of 1937, the United States Supreme Court held that Social Security was constitutionally permissible as an exercise of the federal power to spend for the general welfare, and did not contravene the 10th Amendment.

The case for Flemming vs. Nester was different because Nester was guilty of an offence that required the court to extradite him. He had joined the Communist Party against the notions of his country. Therefore, the judgment based its ruling on the credibility of Nester being a US citizen. But Aubrey has served his country faithfully until the time he leaves the army.

Conclusion

Aubrey Brown would not have to pay any tax on his income. The law allows him to earn a living from his social security disability payments. He should go ahead and demand for implementation of this right through the rightful channels.

References

Bertoni, D. (2010). Social security disability. Washington, D.C: U.S. Government. Accountability Office.

Cortez, A. (2012). Social security disability bootcamp. Eau Claire, Winconsin: NBI. Internal Revenue Service. (n.d.). Web.

Miller, J., & Maine, J. (2010). The fundamentals of federal taxation. Durham, North Carolina: Carolina Academic Press.

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Tax Eligibility and Disability Payment

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