Question

Liam was reimbursed in 2024 by his insurance company for a medical expense that he had previously deducted on his 2023 Schedule A (Form 1040), Itemized Deductions. What is the tax treatment of the recovered medical expense, if any?
The amount recovered is not taxable and should not be included on the 2024 return.
The amount recovered should be deducted on Schedule A (Form 1040), Itemized Deductions, as a medical expense again in 2024.
The recovery is includable in income in the year received up to the amount by which the deduction or credit claimed reduced taxes in the prior year.
The 2023 return must be amended to remove the medical expense that was recovered.

Answer 1

Correct answer: "The recovery is includable in income in the year received up to the amount by which the deduction or credit claimed reduced taxes in the prior year."

Explanation: Under the tax‑benefit rule (IRC §111; IRS Pub. 525 and Pub. 502), a reimbursement for an expense you deducted in a prior year is taxable in the year received to the extent the prior deduction produced a tax benefit. If the prior deduction did not reduce your tax (for example, you received no benefit from the deduction), the recovery is not taxable. Report the taxable portion as other income on your 2024 return (Schedule 1/other income per current form instructions). You generally do not amend the 2023 return unless you actually deducted an amount that you should not have.