Is a foreign tax refund taxable?

[Need2Know2]

Hello!

I worked in Japan for two years and took a foreign earned income exclusion, so I didn't pay U.S. income tax for those years. This year, I received a refund of the money that I had paid into the pension while I was in Japan. (The pension gets returned if you don't stay in Japan.) The total amount of the refund was $1,000 (it was supposed to be $800 after Japanese tax, but my very generous previous employer paid the $200 tax for me, so I received $1,000). My question is, how do I report this on my taxes? Do I add $1,000 to my income and pay regular income tax, or is there something else I should do? 

[DianeW777 · Accepted solution]

Yes, you add the income and pay regular income tax on it. The tax benefit rule states that, if a deduction is taken in a prior year and the underlying amount is recovered in a subsequent period, then the underlying amount must be included in gross income in the subsequent period.  This should be included in your income because you previously received a tax benefit by using the foreign income exclusion.

• Recovery of Tax Benefit Items

Please follow the instructions below to report 'Other Income':

1. Click Federal Taxes -> Wages & Income and scroll down to Less Common Income
2. Go to the last selection, Miscellaneous Income and click Start
3. Go to the last option, Other reportable income and click Start
4. When it asks, "Any other reportable income?" > yes and then type in a description and the amount to report it on your tax return.
5. TurboTax Online and TurboTax CD/Download will use the same procedure.

[Need2Know2]

Thank you so much for your help, I really appreciate it!

[Pebbles2]

Just to clarify for myself, this seems to contradict "Is foreign tax refund taxable in the US?"  If the gross payment was already reported and excluded in the previous year, I'm wondering why the $800 would be included again?  I can see the $200 from the employer being reported, but wondering why the refund would be included again.  Thanks for any clarification.

[ZhuoliA]

DianeW777 is correct that the pension income returned from Japan should be included in the gross income in the current year. Foreign earned income is considered a deduction on your prior year's taxes and you received tax benefits due to the deduction. As such, the recovering amount should be included in the current year's gross income.

@Pebbles2