Itemized Deduction Recovery


M

Me-manny

I received a check from a class action lawsuit about overcharges the
company I retired from made on health care costs.
The info in Pub 17, Ch 21 and Ch 12 treat the recovery as pertaining
to a single year. However in my case the check
covers overcharges for several years. Do I have to amend my return in
each of the previous years affected and prorate the amount to each
year?
Also I did not claim any itemized medical deductions in 2010, so there
is no recovery for 2010, but there is for
previous years.
 
Ad

Advertisements

B

Bill Brown

I received a check from a class action lawsuit about overcharges the
company I retired from made on health care costs.
The info in Pub 17, Ch 21 and Ch 12 treat the recovery as pertaining
to a single year.  However in my case the check
covers overcharges for several years.  Do I have to amend my return in
each of the previous years affected and prorate the amount to each
year?
Also I did not claim any itemized medical deductions in 2010, so there
is no recovery for 2010, but there is for
previous years.
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.
 
B

Bob Sandler

I received a check from a class action lawsuit about overcharges the
company I retired from made on health care costs.
The info in Pub 17, Ch 21 and Ch 12 treat the recovery as pertaining
to a single year. However in my case the check
covers overcharges for several years. Do I have to amend my return in
each of the previous years affected and prorate the amount to each
year?
Also I did not claim any itemized medical deductions in 2010, so there
is no recovery for 2010, but there is for
previous years.
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
 
A

Arthur Kamlet

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.

Bill is right.

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

Advertisements

R

removeps-groups

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.
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.
 

Ask a Question

Want to reply to this thread or ask your own question?

You'll need to choose a username for the site, which only take a couple of moments. After that, you can post your question and our members will help you out.

Ask a Question

Similar Threads

recovery 1
Overpayment Recovery 6
Data Recovery 2
NTFS recovery 0
Error Recovery 2
Category Recovery 0
SQL database recovery 2
Files Recovery 3

Top