Court upholds tax on unreported Social Security benefits
Charmaine A. Gray v. Commissioner. United States Tax Court. No. 11390-25. 2026.
Up to 85% of Social Security benefits can be taxed if a taxpayer’s modified income is above the limits set in §86. The $25,000 threshold does not mean benefits below that amount are always tax-free.
Holding
The Tax Court agreed with a $4,917 tax deficiency after Charmaine Gray did not report $26,268 in Social Security benefits on her 2022 tax return. The Court found that $22,328, or 85% of her benefits, was taxable under §86.
Why It Matters
The decision applies settled law. It does not change the taxation of Social Security benefits or create a new interpretation of §86.
The $25,000 statutory base amount for most single taxpayers does not mean the first $25,000 of Social Security benefits is tax-free. The calculation depends on modified adjusted gross income plus one-half of Social Security benefits.
Taxpayers with substantial wages or other income may have up to 85% of their Social Security benefits included in gross income.
Arguments that Social Security taxation constitutes unconstitutional double taxation remain foreclosed by established Tax Court precedent.
Key Facts
Gray received $65,085 of wages from Stine Seed Co. during 2022.
She also received $26,268 in Social Security benefits, as reported by the Social Security Administration on Form SSA-1099.
Gray reported the wages on Form 1040-SR but reported none of the Social Security benefits.
She claimed the standard deduction, reported no adjustments to adjusted gross income, and reported taxable income of $50,385.
The IRS issued a notice of deficiency on June 23, 2025. It determined that $22,328 of Gray’s Social Security benefits was taxable and calculated a $4,917 deficiency.
Gray disputed the deficiency, claiming her Social Security benefits should not be taxed.
Statutory Framework
Section 61 says that income from all sources counts as gross income. Section 86 sets the rules for taxing Social Security benefits.
For most single taxpayers, §86 sets a $25,000 base amount and a $34,000 adjusted base amount. Social Security benefits become taxable when modified adjusted gross income plus half of the benefits is more than the base amount.
If this combined income is over the adjusted base amount, §86 may require up to 85% of Social Security benefits to be taxed.
The law does not say that Social Security benefits are excluded from tax just because the amount is under $25,000.
Arguments
Taxpayer argued:
Her Social Security benefits were not taxable.
She understood the $25,000 threshold enacted in 1983 to exempt benefits below that amount.
Taxing her Social Security benefits after she had already paid Social Security taxes through payroll withholding amounted to double taxation.
She also challenged the constitutionality of taxing the benefits.
Government argued:
Gray received $26,268 of Social Security benefits and stipulated that she received the income.
Her wages and Social Security benefits exceeded the statutory thresholds in §86.
The statutory formula required $22,328 of her benefits to be included in gross income.
Court’s Reasoning
Gray stipulated that she received the Social Security benefits. That evidence satisfied the IRS’s initial burden to connect her with the unreported income.
Section 86 expressly requires taxpayers to include a portion of Social Security benefits in gross income when income exceeds statutory thresholds.
Gray’s modified adjusted gross income was $65,085, since there were no adjustments shown in the record.
Half of her $26,268 in Social Security benefits was $13,134.
When $13,134 is added to her $65,085 modified adjusted gross income, the total is $78,219. This is much higher than the $34,000 adjusted base amount for her filing status.
Because of this, the §86 formula required her to include up to 85% of her Social Security benefits as taxable income.
85% of $26,268 is $22,328. This was the correct amount to include in her gross income.
The Court did not accept Gray’s argument about the $25,000 threshold. It explained that this amount is part of the income calculation, not a general exclusion.
The Court also rejected her double-taxation and constitutional arguments, citing long-standing precedent supporting § 86.
Result
The Tax Court upheld the IRS’s $4,917 deficiency for Gray’s 2022 tax year.
The Takeaway
This case is a standard use of §86, but it clears up a common misunderstanding. The Social Security thresholds are used to figure out how much of the benefits are taxable. They do not mean that benefits below $25,000 are automatically excluded from tax.
List of Citations
IRC §61(a): Defines gross income broadly as income from all sources.
IRC §86: Governs the inclusion of Social Security benefits in gross income and establishes the applicable income thresholds.
IRC §86(d): Defines Social Security benefits for purposes of §86 and addresses reductions for repayments.
Rule 122, Tax Court Rules of Practice and Procedure: Allows parties to submit a case for decision based on stipulated facts without trial.
Rule 142(a)(1), Tax Court Rules of Practice and Procedure: Generally places the burden of proof on the taxpayer.
Welch v. Helvering, 290 U.S. 111 (1933): Establishes the general presumption that the Commissioner’s deficiency determination is correct.
Walquist v. Commissioner, 152 T.C. 61 (2019): Explains the IRS’s initial evidentiary burden in unreported-income cases.
Day v. Commissioner, 975 F.2d 534 (8th Cir. 1992): Requires some evidence connecting a taxpayer to unreported income before the presumption of correctness applies.
El v. Commissioner, 144 T.C. 140 (2015): Confirms that stipulated receipt of income satisfies the IRS’s initial burden.
Jelle v. Commissioner, 116 T.C. 63 (2001): Applies the §86 formula when income exceeds the adjusted base amount.
Cotroneo v. Commissioner, T.C. Memo. 2024-70: Applies the 85% Social Security inclusion rules under §86.
Lin v. Commissioner, T.C. Memo. 2023-37: Applies §86 to determine the taxable portion of Social Security benefits.
Holland v. Commissioner, T.C. Memo. 2021-129: Rejects arguments attempting to avoid the express taxation of Social Security benefits.
Kelley v. Commissioner, T.C. Memo. 2021-2: Rejects challenges to the statutory Social Security taxation rules and emphasizes that the Tax Court must apply the statute enacted by Congress.
McAdams v. Commissioner, 118 T.C. 373 (2002): Rejects constitutional challenges to §86.
Clark v. Commissioner, T.C. Memo. 1998-280: Upholds the constitutionality of taxing Social Security benefits.
Roberts v. Commissioner, T.C. Memo. 1998-172: Rejects constitutional objections to §86.