Leon was reimbursed in 2023 by his insurance company for a medical expense that he had previously deducted on his 2022 Schedule A (Form 1040), Itemized Deductions. What is the tax treatment of the recovered medical expense, if any?

Question

The amount recovered is not taxable and should not be included on the 2023 return.
The amount recovered should be deducted on Schedule A (Form 1040), Itemized Deductions, as a medical expense again in 2023.
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 2022 return must be amended to remove the medical expense that was recovered.

Answer 1

The correct tax treatment of the reimbursement that Leon received in 2023 for a medical expense that he deducted on his 2022 Schedule A is:

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.

This is consistent with the tax principle known as the "tax benefit rule." If Leon deducted an amount in 2022 and received a reimbursement in 2023, he needs to include that amount as income to the extent it provided a tax benefit in the prior year. He does not need to amend the prior year's return, nor should he deduct the recovered amount again on his 2023 return.