Money Back on a Past Deduction: The Tax Benefit Rule
Published November 7, 2026
Publication 525 (2025), Taxable and Nontaxable Income, explains recoveries. A recovery is money you get back for an amount you deducted or took a credit for in an earlier year. The most common recoveries are reimbursements and rebates of itemized deductions. This guide is general information. It is not advice about your return.
The tax benefit rule
The publication says you must include a recovery in income in the year you receive it. The amount you include is limited. It cannot be more than the amount by which the earlier deduction or credit reduced your tax. Any increase to a carryover that came from the deduction or credit counts as a tax reduction too.
Federal income tax
Federal income tax that is returned to you is not income. Federal income tax is never allowed as a deduction from income, so there is nothing to recover.
State and local income tax
If you receive state or local income tax money back in 2025 for tax you deducted in an earlier year, you generally include it in income. The payer sends Form 1099-G, generally by January 31 of the following year. If you file Form 1040 or 1040-SR, the state and local income tax worksheet in the Schedule 1 instructions figures the amount to include.
If you could have chosen between deducting state income tax and deducting state sales tax, the amount you include is limited. The limit is the excess of the tax you chose to deduct over the tax you did not choose. The publication's Example 26 shows this. For 2024, you could deduct a $10,000 state income tax or a $9,000 state sales tax. You chose the income tax. In 2025, you receive $2,500 back. The most you may have to include is $1,000.
Two years in one payment
If the money back covers amounts paid in 2 or more years, you split it between those years. Example 28 in the publication shows this. A taxpayer paid $4,000 of 2024 estimated state income tax in four equal payments. The last payment was in January 2025. In 2025, the taxpayer receives $400 back. Three-quarters of the tax was paid in 2024, so $300 is a recovery item. The other $100 relates to the January 2025 payment.
When the recovery is not income
- Same year. If the money back and the expense happen in the same year, the recovery reduces the deduction. It is not reported as income.
- Timing. The recovery is included in the year you receive it, not the year of the original payment, subject to the limits above.
- No itemizing. If you took the standard deduction for the year of the expense, do not include the recovery. The publication's Example 29 covers this case.
- Joint state returns. If a joint state return was filed earlier, and you do not file a joint federal return with that person this year, allocate the money back to the person who paid the expense.
Interest you receive on any amount recovered is interest income. Mortgage interest recovered in a later year appears in box 4 of Form 1098. Do not subtract it from the interest you paid in 2025.
Simple steps
- Keep the earlier year's return and the deduction worksheets.
- When money comes back, check the year in which you paid the original amount.
- Check Form 1099-G for state tax money, or box 4 of Form 1098 for mortgage interest.
- Use the worksheets in the publication and the Form 1040 instructions to figure the amount to include.
For related topics, see standard deduction or itemizing, mortgage interest deduction and Form 1098, and state tax money back and Form 1099-G.
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Sources: Sources: IRS, Publication 525 (2025), Taxable and Nontaxable Income, Recoveries (https://www.irs.gov/pub/irs-pdf/p525.pdf) This is general information, not advice about your specific return.
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