Wife received a refund from dentist she paid in 2022, but received the refund in 2023

[fred-frahm]

My wife had dental work in 2022 that she prepaid for, we were not married at the time.  Mid April 2023 she received a $3800+ refund because the dental service ended up not costing as much as she was originally quoted.  When I am adding up our medical expenses, I believe I would add this as a negative amount, thereby reducing our total medical expenses, in our medical expenses.  Is this correct?

[DMarkM1]

Not quite.  You include the amount as "Other Reportable Income" using the steps below.  This is assuming you itemized and used medical deductions in the prior year.

If you did not itemize in the prior year or did not get any medical deductions then you do not need to report the amount.

Here is Publication 502 for reference and extracted below from the "How to handle reimbursements" section.

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

However, don't report as income the amount of reimbursement you received up to the amount of your medical deductions that didn't reduce your tax for the earlier year."

"Wages & Income>Less common Income">Miscellaneous Income>Other reportable Income 

Use "Medical reimbursement" for a description.

[fred-frahm · Accepted solution]

@DMarkM1 

Yes, the expense was itemized in 2022.

You said to go to 

"Wages & Income>Less common Income">Miscellaneous Income>Other reportable Income 

Use "Medical reimbursement" for a description.

That at least got me close to where I needed to go, I believe.  I actually found that instead of using Other reportable Income it appears the better option is "Reimbursed deductions from a prior year" as the more correct option from what I have read.

The Learn More states:

If you are reimbursed or refunded for a deduction you took in a prior year, you may need to report it on this year's tax return as taxable income.

Other examples of reimbursed deductions include:

- Medical expenses reimbursements
- Property, sales, or excise tax refunds
- Moving expense reimbursements
- Reimbursements for casualty and theft losses
- Job business reimbursements

Would you not agree?  Also, thank you for your time in helping me with this.

[MarilynG1]

Yes, you could report it as Reimbursed Deduction IF the expense was claimed as a Medical Deduction in the prior year. In either case, the income is taxed the same way by the IRS. 

If it was not (Standard Deduction used, not Itemized), then you don't need to report the reimbursement on your 2023 return.  Save the documentation that came with the refund, just in case.  

@fred-frahm 

[Opus 17]

This is a taxable recovery, a reimbursement of a previous deduction.  You must look at your 2022 return and use the tax benefit rule to determine if any part is taxable.   Here is an example of how the tax benefit rule might work.

Suppose her income (AGI) was $50,000 and her medical expenses were $8000.  7.5% of $50,000 is $3750, so only $4250 of her medical expenses were deductible.  Her total itemized deduction including the medical bills was $16,000.  The standard deduction for single in 2022 was $12,950, so she got an extra $3050 of deductions more than the standard deduction.  If she recalculates her 2022 tax return after subtracting the reimbursement, her new medical expense deduction is only $450.  Her total itemized deduction would be $12,200.  Since that is less than the standard deduction, she would have used the standard deduction of $12,950 on her tax return.  That means that even though the reimbursement was $3800, the tax benefit from the deduction was $3050.  So only $3050 is reported as taxable income now.  

Note that if she paid the dentist with pre-tax or tax-free money such as an FSA or HSA, the calculation becomes a bit more complicated.