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Recovering Previously Deducted Amounts: Taxable and Nontaxable Income (2025 IRS Guide)

This guide covers “Recovering Previously Deducted Amounts” within taxable and nontaxable income. The following material presents the IRS treatment of this topic, including the qualifications, exceptions, and examples in the source section. Read the rules alongside the facts of your own situation before deciding what to report, deduct, or document.

Adapted from Publication 525 (2025), Taxable and Nontaxable Income, published by the Internal Revenue Service. This guide retains the source edition’s years, amounts, deadlines, and examples. It is guidance for that edition, not a statement that the same figures apply to every tax year.

Context for these rules

The following discussion explains how to determine the amount to include in your income from a recovery of an amount deducted in an earlier year as an itemized deduction. However, you generally don’t need to use this discussion if you file Form 1040 or 1040-SR and the recovery is for state or local income taxes paid in 2024. Instead, use the State and Local Income Tax Refund Worksheet under Instructions for Schedule 1 in the Instructions for Form 1040 to figure the amount (if any) to include in your income.

You can’t use the State and Local Income Tax Refund Worksheet—Schedule 1, Line 1, and must use this discussion if you’re a nonresident alien (discussed later) or any of the following statements are true.

Recovering Previously Deducted Amounts

Overall limitation on itemized deductions no longer applies.

For tax years beginning after 2017, there is no limitation on itemized deductions based on your AGI.

To determine the part of the recovery you must include in income, follow the two steps below.

  1. Figure the greater of:

    1. The standard deduction for the earlier year, or

    2. The amount of itemized deductions you would have been allowed for the earlier year if you had figured them using only the net amount of the recovery item. The net amount is the amount you actually paid reduced by the recovery amount.

    Note: If you were required to itemize your deductions in the earlier year, use step 1b and not step 1a.

  2. Subtract the amount in step 1 from the amount of itemized deductions actually allowed in the earlier year after applying the limit on itemized deductions.

The result of step 2 is the amount of the recovery to include in your income for the year you receive the recovery. If your taxable income for the earlier year was a negative amount, reduce your recovery by the negative amount.

If you had unused tax credits in the earlier year, see Unused tax credits, later.

For more information on this calculation, see Revenue Ruling 93-75. This ruling is in Cumulative Bulletin 1993-2.

Worksheet 2a. Computations for Worksheet 2, Lines 1a and 1b (Keep for Your Records.)

To determine amounts to enter on lines 1a and 1b of Worksheet 2, complete the following.
1. Enter the income tax refund from Form(s) 1099-G (or similar statement) 1. _____
2. Enter the refunds received for state and local real estate taxes and state and local personal property taxes 2. _____
3. Total state and local refunds. Add lines 1 and 2. But don’t enter more than the amount of your state and local taxes shown on your 2024 Schedule A (Form 1040), line 5d 3. _____
4. Is the amount of state and local income taxes (or general sales taxes), real estate taxes, and personal property taxes paid in 2024 (generally, this is the amount reported on your 2024 Schedule A (Form 1040), line 5d) more than the amount on your 2024 Schedule A (Form 1040), line 5e?
❑ No. Enter the amount from line 3 on line 4 and go to line 6.
❑ Yes. Subtract the amount on your 2024 Schedule A (Form 1040), line 5e, from the amount of state and local income taxes (or general sales taxes), real estate taxes, and personal property taxes paid in 2024 (generally, this is the amount reported on your 2024 Schedule A (Form 1040), line 5d). Enter the result here 4. _____
5. Is the amount on line 3 more than the amount on line 4?
❑ No. [STOP] None of the refunds on line 1 or 2 are taxable.
❑ Yes. Subtract line 4 from line 3 and enter the result here 5. _____
6. Add lines 1 and 2 and enter the result here 6. _____
7. Amount to include on Worksheet 2, line 1a:

  • If line 5 is blank, enter the amount from line 1.

  • If there is an amount on line 5, divide line 1 by line 6. Then multiply by the amount on line 5 and enter the result here and on Worksheet 2, line 1a

 7. _____
8. Amount to include on Worksheet 2, line 1b:

  • If line 5 is blank, enter the amount from line 2.

  • If there is an amount on line 5, divide line 2 by line 6. Then multiply by the amount on line 5 and enter the result here and on Worksheet 2, line 1b

 8. _____

Worksheet 2. Recoveries of Itemized Deductions (Keep for Your Records.)

To determine whether you should complete this worksheet to figure the part of a recovery amount to include in income on your 2025 tax return, see Itemized Deduction Recoveries. You generally don’t need to use this worksheet if you file Form 1040 or 1040-SR and the recovery is for state or local income taxes paid for the immediately preceding tax year. If you recovered amounts from more than 1 year, such as a state income tax refund from 2024 and a casualty loss reimbursement from 2023, complete a separate worksheet for each year. Use information from your tax return for the year the expense was deducted.
A recovery is included in income only to the extent of the deduction amount that reduced your tax in the prior year (year of the deduction). If you were subject to the AMT or your tax credits reduced your tax to zero, see Unused tax credits and Subject to AMT under Itemized Deduction Recoveries. If your recovery was for an itemized deduction that was limited, you should read Itemized deductions limited under Itemized Deduction Recoveries.
NOTE: Before completing lines 1a and 1b, see Worksheet 2a, Computations for Worksheet 2, Lines 1a and 1b.
1a. State/local income tax refund or credit1 1a. _____
1b. State/local real estate and personal property taxes1 1b. _____
2. Enter the total of all other Schedule A (Form 1040) refunds or reimbursements (excluding the amounts you entered on lines 1a and 1b)2 2. _____
3. Add lines 1a, 1b, and 2 3. _____
4. Itemized deductions for the prior year. For 2024:

  • Schedule A (Form 1040), line 17

  • Schedule A (Form 1040-NR), line 8

 4. _____
5. Enter any amount previously refunded to you (don’t enter an amount from line 1a, 1b, or 2) 5. _____
6. Subtract line 5 from line 4 6. _____
7. Standard deduction for the prior year.3 If you filed Form 1040-NR, enter -0- 7. _____
8. Subtract line 7 from line 6. If the result is zero or less, stop here. The amounts on lines 1a, 1b, and 2 aren’t taxable 8. _____
9. Enter the smaller of line 3 or line 8 9. _____
10. Taxable income for prior year4 (2024 Form 1040, line 15; or 2024 Form 1040-NR, line 15) 10. _____
11. Amount to include in income for 2025:

  • If line 10 is zero or more, enter the amount from line 9.

  • If line 10 is a negative amount, add lines 9 and 10 and enter the result (but not less than zero)5

11. _____
If line 11 equals line 3:
Enter the amount from line 1a on Schedule 1 (Form 1040), line 1; or
Enter the amounts from lines 1b and 2 on Schedule 1 (Form 1040), line 8z.
If line 11 is less than line 3 and either line 1a or line 1b or line 2 is zero:
If there is an amount on line 1a, enter the amount from line 11 on Schedule 1 (Form 1040), line 1; or
If there is an amount on lines 1b and/or 2, enter the amount from line 11 on Schedule 1 (Form 1040), line 8z.
If line 11 is less than line 3, and there are amounts on line 1a and on line 1b or 2, complete the following worksheet.
A. Divide the amount on line 1a by the amount on line 3. Enter the percentage A. _____
B. Multiply the amount on line 11 by the percentage on line A. Enter the result here and on Schedule 1 (Form 1040), line 1 B. _____
C. Subtract the amount on line B from the amount on line 11. Enter the result here and on Schedule 1 (Form 1040), line 8z C. _____
  • 1 Don’t enter more than the amount deducted for the prior year. Don’t enter more than the excess of your state and local income tax deduction over your state and local general sales taxes you could have deducted.
  • 2 Don’t enter more than the amount deducted for the prior year. If you deducted state and local general sales taxes and received a refund of those taxes, include the amount on line 2, but don’t enter more than the excess of your sales tax deduction over your state and local income tax you could have deducted.
  • 3 See the instructions for prior-year forms at IRS.gov for prior-year standard deduction.
  • 4 If taxable income is a negative amount, enter that amount in brackets. Don’t enter zero unless your taxable income is exactly zero. See Negative taxable income. Taxable income will have to be adjusted for any net operating loss carryover. For more information, see the Instructions for Form 172.
  • 5 For example, $700 + ($400) = $300.

Using the guidance

Keep the documents that establish the dates, amounts, and circumstances described above. References to other chapters, forms, worksheets, or earlier and later sections refer to the linked IRS publication. Check the full publication and its updates before relying on a rule for a different tax year or a situation not addressed here.

Sources and further reading

The cited U.S. government text is in the public domain. Source accessed October 28, 2026. Fynoptic has organized this material for educational use and is independent of, and not endorsed by, the IRS.

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