Tax on Social Security Paid to Disabled Soldiers

Soldiers and military personnel have long been recognized for their service and sacrifices to their country, and as a result, society has generally agreed that they should be given certain privileges. These privileges often include access to free or reduced-cost education, health benefits, and retirement benefits, among others. For example, the GI Bill provides education benefits to veterans, while the VA provides health care benefits.

However, the tax treatment of retirement benefits for disabled soldiers has been an issue that the courts and Congress have been less generous with. In the case of Reimels v. United States, 97 AFTR 2d 2006-820 (2nd Cir. 2007), the court had to decide whether the Social Security payments received by the veteran were excluded from his gross income as amounts paid on account of his physical injury or sickness resulting from active military duty under Section 104(a). The case considers whether Social Security benefits received by the veteran for on-the-job injuries were excluded under this part of Section 104.

Facts & Procedural History

Reimels was a soldier who was exposed to Agent Orange while serving in Vietnam. In the late 90’s Reimels was unable to work due to the lung cancer he developed as a result of being exposed to Agent Orange.

Reimels was awarded compensation from the Veteran’s Affairs Office and Social Security benefits. Reimels did not report either payment on his 1999 tax return, arguing that the payments were to be excluded from his gross income as amounts paid on account of his physical injury or sickness resulting from active military duty under Section 104(a).

The court had to decide whether the Social Security payments were excluded from the taxpayer’s income.

Damages for Physical Injuries or Sickness

Our tax law includes several exclusion provisions. These provisions say that certain amounts one receives are not subject to income tax.

Section 104 provides that gross income does not include certain amounts received for personal injuries or sickness, such as amounts received under workmen’s compensation acts, damages received on account of personal physical injuries, and amounts received as a pension or annuity for personal injuries resulting from active service in the armed forces. Taxpayers have argued that this exclusion applies to a number of different types of injuries, such as loss of consortium, being born with a medical disability, and other lawsuit settlement agreement awards.

There are also provisions for the exclusion of disability income attributable to injuries incurred as a direct result of a terroristic or military action and amounts received through certain programs established under the laws of any state. Buried within this exclusion is language for injuries from the armed services. It says that gross income does not include “amounts received as a pension, annuity, or similar allowance for personal injuries or sickness resulting from active service in the armed forces of any country.” The taxpayer in this case asked the court to rule that his Social Security payments were within this armed forces part of the exclusion.

Social Security Payments for Military Disabilities

The U.S. Tax Court held that the benefits were to be included in Reimels’ income because Social Security “was not designed to compensate for military injuries.” The logic is that Social Security benefits could be paid for other injuries, not just military injuries. In this case (as in Haar case cited in this court opinion), the benefits were actually paid on account of military injuries. Thus, the standard is not what actually happened, but what could have happened.

Here is a quote from the Haar opinion: “Because disability payments under the Civil Service Retirement Act are not paid for personal injuries or sickness incurred in military service, we conclude that section 104(a)(4) did not entitle petitioner to exclude the disability payments he received in the years in issue.” Yet the benefits in the Haar case were paid for personal injuries incurred in military service. The same goes for the Reimels case.

On appeal, the appeals court upheld the trial court’s decision. While it may have been sympathetic to Reimels, it followed prior precedent in narrowly construing Section 104.

The result is that Social Security payments received by military personnel for on-the-job injuries are not excluded under this part of Section 104. This differs from other payments, such as Army pension payments.

The Takeaway

This court case highlights the issue of tax treatment for retirement benefits for disabled soldiers. While soldiers and military personnel are afforded certain privileges such as free or reduced-cost education, health benefits, and retirement benefits, the courts and Congress have been less generous with the tax treatment of retirement benefits for disabled soldiers. In this case, the court decided that Social Security payments received by military personnel for on-the-job injuries are not excluded under Section 104 of the tax law, which excludes certain types of compensation for injuries or sickness. This decision follows prior precedent in narrowly construing Section 104 and highlights the need for greater consideration of the tax treatment of retirement benefits for disabled soldiers.