A recovery or refund of a previously deducted item increases net investment income in the year of the recovery.
Generally, for purposes of determining the gross amount of the recovery, including the recovery of any amount that was deducted in a prior year, regardless of the application of the tax benefit rule. For example, if a taxpayer receives a refund of state income taxes from a prior year, such a refund would be included in the taxpayer's gross income. There are exceptions to the general rule provided in the IRS guidance in the link below.
Review IRS guidance on Form 8960. Click on Line 7-Deduction Recoveries Worksheet
Deduction Recoveries
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