IRC 86

The United States Tax Court in Smith v. Comm’r at T.C. Memo 2026-25 filed March 19, 2026 ruled that the only income offset for repayment of Social Security Disability payments can occur in the year the repayments are made.  This case and its effects are unfortunate and likely unintended, but a statute is a statute.  Taxpayer was injured and applied for Social Security Disability in 2022.  In November of 2022, he was awarded disability and was paid a retroactive award for the March 2022 to November 2022 time period.  He then received monthly benefits from December 2022 through March 2023. In April 2023, SSA ceased making payments because they learned the taxpayer had been working since April 2022.  He actually held two part time jobs in 2022 – earning a total of $16,535.  Because he technically did not qualify for disability, he had to repay the benefits paid to him by SSA. He paid a lump sum of $31,116 on May 26, 2023 and monthly payments during 2023 and 2024. He did not report any Social Security benefits paid to him in 2022 on his 1040, though he received an SSA-1099. He was ultimately issued a Notice of Deficiency for $5,454.  He essentially argued to the Court that he re-paid all the money, so it was a wash. However, the statute states that the amount of Social Security received in the taxable year may be reduced by repayments made by the taxpayer “during the taxable year.” As such, he could not reduce his 2022 Social Security income by the amounts he paid back during 2023 and 2024. The Court expressed that they understood the taxpayer’s position, but they were bound by the statute.