Question

Taxpayers who deduct an expense one year but recover it the next year are required to include the recovered amount in gross income. The tax benefit rule provides relief if the original deduction did not result in any tax savings. Does this rule provide relief to taxpayers who are in a higher tax bracket in the Year they recover the previously deducted expense?

Answer 1

The tax benefit rule provides relief to taxpayers by not including a recovered amount in their gross income if there were no tax savings from the initial deduction. However, this relief may not apply to taxpayers in a higher tax bracket when they recover the previously deducted expense.

Step-by-step explanation:

Taxpayers who deduct an expense one year but recover it the next are required to include the recovered amount in their gross income. The tax benefit rule provides relief by not requiring inclusion of the recovered amount if the original deduction did not result in any tax savings.

When taxpayers in a higher tax bracket recover a previously deducted expense, they may not receive relief if the recovery period's tax rate is higher compared to the period of the initial deduction. If the original deduction resulted in tax benefit by reducing taxable income, the recovery must be included in gross income, which may result in paying more tax due to a higher marginal tax rate.