Page 49 - Virtual Currencies

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The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.
1. Divide your state income tax refund by the the filing status for that prior year. If you filed deducting medical expenses, you deducted
total of all your itemized deduction recov- Form 1040-NR, you couldn't claim the standard only $200 as an itemized deduction. In 2022,
eries. deduction. you received a $500 reimbursement from your
2. Multiply the amount of taxable recoveries Example 32. You filed a joint return on medical insurance for your 2021 expenses. The
by the percentage in (1). This is the only amount of the $500 reimbursement that
amount you report as a state income tax Form 1040 for 2021 with taxable income of must be included in your income for 2022 is
$45,000. Your itemized deductions were
refund. $25,350. The standard deduction that you could $200, the amount actually deducted.
3. Subtract the result in (2) above from the have claimed was $25,100. In 2021, you recov- Overall limitation on itemized deductions
amount of taxable recoveries. This is the ered $2,100 of your 2021 itemized deductions. no longer applies. For tax years beginning
amount you report as other income. None of the recoveries were more than the ac- after 2017, there is no limitation on itemized de-
tual deductions for 2021. Include $250 of the re- ductions based on your AGI.
Example 31. In 2022, you recovered coveries in your 2022 income. This is the To determine the part of the recovery you
$2,500 of your 2021 itemized deductions smaller of your recoveries ($2,100) or the must include in income, follow the two steps be-
claimed on Schedule A (Form 1040), but the re- amount by which your itemized deductions low.
coveries you must include in your 2022 income were more than the standard deduction
are only $1,500. Of the $2,500 you recovered, ($25,350 − $25,100 = $250). 1. Figure the greater of:
$500 was due to your state income tax refund. a. The standard deduction for the earlier
Your state income tax was more than your state Negative taxable income. If your taxable in- year, or
general sales tax by $600. The amount you re- come for the prior year (Worksheet 2, line 10)
port as a state tax refund on Schedule 1 (Form was a negative amount, the recovery you must b. The amount of itemized deductions
1040), line 1, is $300 [($500 ÷ $2,500) × include in income is reduced by that amount. you would have been allowed for the
$1,500]. The balance of the taxable recoveries, You have a negative taxable income for 2021 if earlier year if you had figured them
$1,200, is reported as other income on Sched- your: using only the net amount of the re-
ule 1 (Form 1040), line 8z. • Form 1040, the sum of lines 12c and 13, covery item. The net amount is the
was more than line 11; or amount you actually paid reduced by
Standard deduction limit. You are generally • Form 1040-NR, line 14, was more than the recovery amount.
allowed to claim the standard deduction if you line 11. Note. If you were required to itemize
don't itemize your deductions. Only your item- your deductions in the earlier year, use
ized deductions that are more than your stand- Example 33. The facts are the same as in step 1b and not step 1a.
ard deduction are subject to the recovery rule Example 32, except line 14 was $200 more
(unless you're required to itemize your deduc- than line 11 on your 2021 Form 1040, giving 2. Subtract the amount in step 1 from the
tions). If your total deductions on the earlier you a negative taxable income of $200. You amount of itemized deductions actually al-
year return weren’t more than your income for must include $50 in your 2022 income, rather lowed in the earlier year after applying the
that year, include in your income this year the than $250. limit on itemized deductions.
lesser of: The result of step 2 is the amount of the recov-
• Your recoveries, or Recovery limited to deduction. You don't in- ery to include in your income for the year you
• The amount by which your itemized deduc- clude in your income any amount of your recov- receive the recovery. If your taxable income for
tions exceeded the standard deduction. ery that is more than the amount you deducted
in the earlier year. The amount you include in the earlier year was a negative amount, reduce
Standard deduction for earlier years. your income is limited to the smaller of: your recovery by the negative amount.
To determine if amounts recovered in the cur- • The amount deducted, or If you had unused tax credits in the earlier
rent year must be included in your income, you • The amount recovered. year, see Unused tax credits, later.
must know the standard deduction for your filing For more information on this calculation, see
status for the year the deduction was claimed. Example 34. For 2021, you paid $1,700 Revenue Ruling 93-75. This ruling is in Cumula-
Look in the instructions for your tax return from for medical expenses. Because of the limit on tive Bulletin 1993-2.
prior years to locate the standard deduction for

Page 26 Publication 525 (2022)