How do I treat reimbursement for prior year medical expenses

[xmasbaby0]

Why are you asking this question?   Did you itemize medical expenses in that prior year and then receive reimbursement for an expense you entered as having paid out of pocket on your tax return?

[DoninGA]

Did you use Itemized Deductions instead of the Standard Deduction for the prior year?

Look at your Form 1040 Line 12.

[Bsch4477]

If you are reimbursed in a later year for medical expenses you deducted in an earlier year, you generally must report the reimbursement as income up to the amount you previously deducted as medical expenses.

However, you do not report as income the amount of reimbursement you received up to the amount of your medical deductions that did not reduce your tax for the earlier year.

[kerry661]

I might be getting reimbursed for out-of-pocket medical expenses in 2021. That year, we had over $15,000 out of pocket and deducted just over $5,000.

[rjs]

"I might be getting reimbursed ..."

MIGHT? First of all, don't do anything until you actually receive the reimbursement. If you do get reimbursed, you will handle it on your tax return for the year that you receive the reimbursement. Since you haven't received it yet, you will be getting it in 2025 or later, so you have plenty of time to deal with it.

"... and deducted just over $5,000."

Do you mean that on your 2021 tax return Schedule A line 4 is a little over $5,000? If not, what is the amount on your 2021 Schedule A line 4?

If you do have an amount on Schedule A line 4, the reimbursement is called an itemized deduction recovery. You will have to report part or all of the reimbursement as taxable income in the year that you receive it. You report only the amount that actually reduced your tax in 2021. The calculation of that amount is complicated, and TurboTax will not do it for you. (It could be affected by other things besides the amount of medical expenses you deducted.) You have to do the calculation yourself outside of TurboTax, and enter in TurboTax the taxable amount that you calculate. You will need a copy of your 2021 federal tax return.

You would have the option to report the full amount of the reimbursement as taxable income, which would save you the trouble of doing the calculations. The IRS will not complain if you do that. But it's probably a significant amount, and there's a good chance that the full amount would not be taxable if you do the calculations.

The rules for calculating the taxable amount that you have to report are under "Recoveries" in IRS Publication 525, Taxable and Nontaxable Income.

Since your itemized deduction recovery is for medical expenses, don't forget to take into consideration the fact that your deduction for medical expenses was reduced by 7.5% of your AGI. See Example 34 in Publication 525.

After you calculate the taxable amount that you have to report as income, you enter it in TurboTax. You should be able to get to the right place by entering "reimbursed deductions" (without the quotes) in the Search box, then clicking the link that says "Jump to reimbursed deductions."

If you paid any of your out-of-pocket medical expenses from an HSA, MSA, or FSA it gets a little more complicated because you had a tax benefit from using the tax-free account, separate from the itemized deduction.

If your state allowed a deduction for medical expenses in 2021, you would have to check the rules regarding recoveries for your particular state.

If this is too overwhelming, you might wish to consult a local tax professional for further guidance, since it might involve a significant amount of money.

The information in this reply is specific to the facts given in the question, and might not apply to other situations.

[kerry661]

Thank you so much! I appreciate the in-depth response because I am very familiar with tax terms and Turbo Tax. I also appreciate the reiteration of "Might" :-).  That's exactly why I am asking the question now so that when it does come time, I will know how and where to handle it. Again, Thank you!!