Taxpayer’s Social Security benefits are taxable despite his subsequently repaying them

Social Security Disability Insurance (SSDI) benefits a taxpayer received were properly included in gross income in the year he received them, and his subsequent repayment of those benefits could not offset that income, the Tax Court held.

Facts: Michael Smith timely filed Form 1040, U.S. Individual Income Tax Return, for 2022, listing his occupation as “retired.” Smith, however, worked for two employers during 2022. Both employers filed Forms W-2, Wage and Tax Statement, with the IRS reporting total wages of $16,535. Smith reported this amount on his 2022 Form 1040 as wage income.

Prior to filing his return, Smith had suffered “an allegedly disabling injury.” In April 2022, Smith applied to the Social Security Administration (SSA) for benefits under the SSDI program. In November 2022, the SSA issued Smith an award letter indicating that he was entitled to retroactive benefits payable in a lump sum for March 2022 through November 2022, with monthly payments beginning thereafter. The SSA began making these monthly payments in December 2022 and for the first three months of 2023.

In April 2023, the SSA ceased making Smith’s monthly disability payments. In a letter dated March 14, 2024, the SSA explained that Smith’s disability payments were discontinued as of April 2023 because it learned that he had been working since April 2022 and that he should have never been entitled to receive them. Therefore, he was required to repay the benefits. He made a $31,116 payment on May 26, 2023, and satisfied the remaining balance via monthly payments during 2023 and 2024.

Smith did not report the SSDI benefits received in 2022 on his Form 1040. The IRS received from the SSA a Form SSA-1099, Social Security Benefit Statement, reporting that it paid him $26,802 in benefits in 2022. On its examination of Smith’s return, the IRS determined that he should have reported $22,782, or 85% of that total, as gross income under Sec. 86(a). In December 2024, the IRS issued Smith a timely notice of deficiency for this adjustment.

Smith timely petitioned the Tax Court for a redetermination, contending that the SSDI payments represented “an accidental overpayment” that he fully repaid. The IRS filed a motion for summary judgment, contending that Smith was liable for the tax on the SSDI benefits he received in 2022.

Issues: Gross income specifically includes Social Security benefits, which include “any amount received by the taxpayer by reason of entitlement to … a monthly benefit under title II of the Social Security Act” (Secs. 86(a)(1) and (d)(1)). SSDI benefits are monthly or lump-sum payments made under Title II of the Social Security Act (Social Security Amendments of 1956, P.L. 84-880).

Up to 85% of Social Security benefits may be included in gross income under Secs. 86(a)–(c). The amount of Social Security benefits received is “reduced by any repayment made by the taxpayer during the taxable year of a social security benefit previously received by the taxpayer (whether or not such benefit was received during the taxable year)” (Sec. 86(d)(2)(A), emphasis added).

The IRS calculated that $22,782 of the SSDI benefits were includable in Smith’s gross income under the statutory formula, which Smith did not challenge. Smith contended, though, that the SSDI payments received in 2022 should be excluded from gross income because he was required to repay them, which he did during 2023 and 2024. Smith saw the SSDI benefits as “tantamount to loan proceeds that should be excluded from his income.”

The court noted it was bound by the provisions of the Code, even though it understood “why [Smith] views his predicament in this way.” Smith did not dispute that he received the SSDI benefits and that they needed to be reported as gross income. However, the repayments he made in 2023 and 2024 had no bearing on his 2022 tax liability since he could reduce the 2022 benefits only by repayments made during that tax year under Sec. 86(d)(2)(A). This, the court explained, is one example of the “annual accounting principle,” which generally governs the computation of taxable income (Sec. 451(a); Yoklic, T.C. Memo. 2017-143). Sec. 451(a) provides that for a cash-basis taxpayer, any amount of gross income received “shall be included in the gross income for the taxable year in which received by the taxpayer” (see also Regs. Sec. 1.451-1(a)).

Smith also argued that the income should not be included in 2022, based on the claim-of-right doctrine articulated in North American Oil Consolidated v. Burnet, 286 U.S. 417 (1932). In that case, the Supreme Court held (quoting Board, 51 F.2d 73 (6th Cir. 1931)) that “‘[i]f a taxpayer receives earnings under a claim of right and without restriction as to its disposition, he has received income which he is required to [report],’ even though he might later be required to refund the money.” The court determined, however, that this doctrine did not help Smith, finding that he had “clearly” received the SSDI benefits in 2022 because he had applied for the benefits and the SSA had confirmed in a letter that he was entitled to them. As the court observed, the SSA did not reverse its decision until 2023.

Holding: In granting the IRS’s motion for summary judgment, the court held that it was unable to consider the effect of a repayment made in any year other than 2022, the only year over which it had jurisdiction. Any relief Smith might be entitled to, the court said, “must be determined for the tax year in which the repayment was made” (Sec. 86(d)).

• Smith, T.C. Memo. 2026-25

— John McKinley, CPA, CGMA, J.D., LL.M., and Thomas Godwin, CPA, CGMA, Ph.D., are both professors of the practice in accounting and taxation in the SC Johnson College of Business at Cornell University in Ithaca, N.Y. To comment on this column, contact Paul Bonner, the JofA‘s tax editor.