Legal Definitions - tax-benefit rule

Tax-Benefit Rule

The tax-benefit rule is a principle that states if a taxpayer recovers a loss or expense that was deducted in a previous year, the recovery must be included in the current year's gross income to the extent that it was previously deducted. This is also known as the tax-benefit doctrine.

Let's say you own a rental property and in 2019, you had to pay $5,000 for repairs. You deducted this expense on your 2019 tax return. In 2020, you received an insurance reimbursement of $3,000 for the same repairs. According to the tax-benefit rule, you must include the $3,000 reimbursement as income on your 2020 tax return because you previously deducted the $5,000 expense in 2019.

Another example is if you claimed a deduction for a charitable donation in a previous year and then received a refund for that donation in the current year, you would need to include the refund as income on your current year's tax return.

The tax-benefit rule ensures that taxpayers do not receive a double tax benefit for the same expense or loss. If a taxpayer deducts an expense or loss in one year and then recovers that expense or loss in a subsequent year, the recovery must be included in the taxpayer's income to prevent them from receiving a tax benefit twice. The examples illustrate how the tax-benefit rule works in practice and how it affects a taxpayer's income in the year of recovery.