How to Recover a Tax Deduction From a Previous Year

If you have ever received a state tax refund after you deducted state income taxes you paid, or deducted mortgage interest that was later adjusted by your lender, you may have a recovery to report to the Internal Revenue Service. If you take a deduction for an item but later receive a refund or adjustment of the item that reduces the amount you deducted, you must account for the difference in the year you receive the adjustment. You’ll need to report the recovery as income because you previously claimed a tax benefit for a greater amount.

Review your tax return from the previous year. If you claimed a standard deduction for your filing status, you don’t need to recover any adjustments. However, if you itemized deductions on Schedule A, you’ll need to calculate the recovery amount to report as income on your current year return.

Find the difference between the itemized deductions you claimed and the standard deduction for your filing status from the previous year. For example, if the standard deduction for your status was $5,800 and you claimed $7,000 in itemized deductions, the difference is $1,200. In this scenario, you received a $1,200 benefit by claiming itemized deductions.

Add your total recoveries. If the amount is less than the difference between your itemized deductions and the standard deduction, you’ll need to report the full amount of your recoveries as income. However, if your recoveries exceed the difference, you’ll only need to report the amount that meets the difference. For example, if the difference between deduction types is $1,200 and you recover $1,400, you’ll only report $1,200 as recovery income. Since the IRS allows each taxpayer to claim at least the standard deduction, you don’t need to claim any recovery that causes the difference to fall below the standard amount for your filing status.

Claim recoveries as income. If your recovery involves a state tax refund you received, claim the amount on line 10 of your current year Form 1040. If the recovery involves any other type of itemized deduction, claim the amount on line 21 as “Other Income.”


About the Author

With a background in taxation and financial consulting, Alia Nikolakopulos has over a decade of experience resolving tax and finance issues. She is an IRS Enrolled Agent and has been a writer for these topics since 2010. Nikolakopulos is pursuing Bachelor of Science in accounting at the Metropolitan State University of Denver.