Social Security disability benefits under Section 104
March 21, 2014
Tax treatment of workers comp and disability benefits
March 21, 2014
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Disability payments excluded from gross income

Certain disability payments are excluded from gross income under Section 104(a)(1), and therefore receive special tax treatment. However, those disability payments must be received under a statute that is “in the nature of a workers compensation act.” Whether a statute qualifies depends upon the precise language and nuances of the statue. See Question “What is the tax treatment of workers compensation and disability benefits?”

How precise the language of the statue must be is difficult to answer in the abstract. Concrete cases are more illustrative. For example, in Byrne v. Commissioner, 84 T.C.M (CCH) 704 (2002), the Tax Court held that the California Judges’ Retirement Law is a dual purpose statute which provides both retirement benefits and benefits in the nature of workmen’s compensation acts. The exact language of the statute at issue is as follows:

“Any person who becomes a judge during the period of January 1, 1980, through December 31, 1988, shall not be eligible to be retired for disability unless the judge is credited with at least two years of judicial service or unless the disability is a result of injury or disease arising out of and in the course of judicial service.” The taxpayer in Byrne was allowed to exclude payments received under the statute because he received his benefits under the second portion of the statute that addressed injuries arising during the course of judicial service (and not the portion which conditions payments based upon years of service), which the Tax Court held to be within the nature of a workmen’s compensation act.