Federal tax law has recently been amended to confirm that certain payments to or on behalf of a public safety officer who is disabled or dies from an injury sustained in the line of duty are nontaxable. On May 22, 2015, President Obama signed this legislation which was passed unanimously by Congress and is entitled the Don’t Tax Our Fallen Public Safety Heroes Act (the “Heroes Act”).
The Heroes Act provides that amounts paid under Section 1201 of the Omnibus Crime Control and Safe Streets Act of 1968 are nontaxable. The 1968 Act created federal programs known as the federal Public Safety Officers’ Benefits Programs (PSOB) which provide death and education benefits to survivors of fallen law enforcement officers, firefighters, and other first responders, and disability benefits to officers catastrophically injured in the line of duty. These benefits are paid by the Bureau of Justice Assistance of the U.S. Department of Justice to a public safety officer who has become permanently and totally disabled as the direct and proximate result of a personal injury sustained in the line of duty, or to the beneficiaries of a public safety officer who has died as the direct and proximate result of a personal injury sustained in the line of duty. The amount of the PSOB benefit is $339,310.00 for eligible deaths and disabilities occurring on or after October 1, 2014. The amount of the PSOB educational assistance benefit for one month of full-time assistance on or after October 1, 2015 is $1018.00. Further information on the PSOB can be found on the U.S. Department of Justice website.
The Heroes Act also provides that amounts paid under a program established under the laws of any state which provides monetary compensation for surviving dependants of a public safety officer who has died as a direct and proximate result of a personal injury sustained in the line of duty is not taxable, except that this exclusion does not apply if the amount would have been payable even if the death had not occurred in the line of duty. Of particular note, this specific statutory exclusion from taxable income for payments from programs established under the laws of any state does not apply to disability benefits paid to officers injured in the line of duty.
Prior to the passage of this amendment, some state-based public safety agencies relied on the exclusion from federal income taxation of workmen’s compensation payments to determine that public safety officer death benefits were not taxable, but the employer or benefit plan sponsor needed to file a private letter ruling request with the IRS to assure that treatment, a process that is time consuming and costly. The Heroes Act will assure that these specific death benefits will be treated as nontaxable by the IRS.
It seems clear that the exclusion for amounts paid under “the laws of any state” would apply to state level programs, but it is somewhat unclear whether this exclusion from taxable income will apply to benefit plans adopted at the local or county level, including those adopted pursuant to a state statute. On one hand, the legislative history to this bill contains a number of references that indicate that Congress felt that taxes should not have to be paid by public safety officers or their beneficiaries on benefits paid for injuries or death suffered in the line of duty, including this statement by Representative Dave Reichert (R-Wash.), a former sheriff in Washington state:
When a public safety officer has been catastrophically injured or killed in the line of duty, their families should not also have to deal with paying taxes on the benefits they receive after that loved one has paid the ultimate price while protecting their fellow Americans. The sacrifices of our men and women who wear the badge keep us safe, and now we have the opportunity to help provide for those that they leave behind.
On the other hand, the legislative history and some Congressional office summaries make a number of references to a state, state-based or state-run program, benefit or payment “similar” to the federal PSOB, but no references are made to a county or local benefit plan, though there are at least two references in the legislative history to a sheriff officer and a Sheriff’s Association. Hopefully this issue will be clarified in the near future, perhaps thru IRS guidance.
Some states follow federal tax law when computing state taxable income and so it is possible that amounts excluded from federal income tax under the Heroes Act will be excluded from state income tax.