Under the so-called “tax benefit rule”, a taxpayer need not include in his gross income (and therefore need not pay tax on it) amounts recovered for his loss if he did not receive a “tax benefit” for the loss in a prior year. Equivalently stated, taxpayers must include in income any amounts recovered if they received a tax benefit in a prior year for that loss.
For example, if a taxpayer recovers an expense or loss that he previously wrote off against the prior year’s income, then the recovered amount must be included in the current year’s gross income. A “tax benefit,” is interpreted broadly and includes any exclusion, deduction or credit which reduced federal income tax due in a prior year. A tax benefit also includes increases in unexpired carryover losses for which the taxpayer has not yet utilized. IRC 111(c).
What is the tax benefit rule and its significance? was last modified: March 21st, 2014 by Tax