Medical Expense revision on last years taxes - Question

[kjsommer67]

I have a unique situation and want to make sure that I handle things properly.  My wife was seriously injured on an overseas trip last year in Hungary.  Because of the lack of care she was receiving and her deteriorating condition I life flighted her back to the United States at a personal cost of $250,000.00.  I claimed this as an allowable medical expense on my taxes in 2023.  After many trials and tribulations, the travel insurance company finally agreed that the flight was medically necessary and has reimbursed us for the cost of the flight home.  I realize that I now have to claim this as the medical expenses are no longer a valid deduction.  What is the correct way to do this?  Do I amend my tax return from last year or do I declare the reimbursement on this years  taxes?  

[rjs · Accepted solution]

You do not amend your 2023 tax return. The reimbursement is called an itemized deduction recovery. You report part or all of it as income on your 2024 tax return. TurboTax will not calculate the amount that you have to report as income. You have to calculate it yourself. In TurboTax enter the amount that you calculate in Reimbursed Deductions under Miscellaneous Income. See "Recoveries" in IRS Publication 525 for instructions to calculate the amount that you have to report as income.

The calculation of the amount to report as income can be complicated. You have the option to just report the full amount as income. The IRS will not object. But since your case involves a large amount of money, it seems worth the trouble to go through the IRS instructions to see if you don't have to report the full amount.

[Opus 17]

You calculate the taxable portion using the tax benefit rule.  Remember that medical expenses are only deductible if you itemize and only after the 7.5% rule.  Suppose your AGI is $500,000.  7.5% of that is $37,500, so you would only have been able to actually deduct $212,500 of the Life flight.  So that would be the taxable recovery (the amount of tax benefit, $212,500).  But supposing your income was lower, you might not have used the entire deduction because the deduction was bigger than your income.  That would also be a case where the actual benefit of the deduction was less than the potential deduction. 

There may be some other nuances depending on your situation. Publication 525 explains the tax benefit rule for recoveries.