Itemized Deduction Recovery

To the extent that you got a tax benefit from deducting the overcharges as medical expenses on prior years' returns, you have taxable income this year. The prior years' returns are not amended.

Read the section on "Recoveries" in Pub. 525. It has a paragraph on "Recovery for 2 or more years," and an example. Don't stop reading there. Continue on to "Itemized Deduction Recoveries." The whole topic takes up about 8 pages. It's not simple.

Bob Sandler

Bill is right.

But did they tell you how much of the refund was attributable to each year?

One may have to amend the return, and keep this amended return in one's records as a hypothetical tax return, in order to determine the amount of recovery. For example suppose in 2009 the person had an AGI of $100,000 and paid $7,600 in medical expenses. In 2011 they receive a refund of $200 for that year. Because of the 7.5% rule only $100 of medical expenses are deductible on Schedule A. So only $100 is taxable on 2011, not the full $200.

If you took the standard deduction, there is no recovery.

Or suppose taxpayer is married and standard deduction is $10,000 and he paid $17,900 in medical expenses in 2009. The deductible medical expenses on Schedule A are just $7,900. Suppose charitable contributions and state tax are exactly $2500, so total itemized deductions are $10,400. Suppose in person receives a refund of $1,000. In the hypothetical amended return the total itemized deduction is reduced by $1,000 to $9,400. However in this case the person would have chose the standard deduction of $10,000. So the medical expenses only saved them $400, so only $400 of the recovery is taxable.

You report the recovery on line 21 Other Income.