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Suppose a medical service is provided on December 30, 2015 and the bill is paid on the same day. The provider accidentally re-bills for the service in January 2016, and the bill is paid again. Shortly after realizing you paid for the same service twice, you contact the provider and they issue you a refund. Now you have receipts in two different tax years. Obviously you can't deduct them both in different years, so which year should you deduct the expense?

I suspect the reasonable answer would be you should never have a choice, as the situation must dictate the actual tax year. But in order for that to be true, then it must be clear which payment the refund was applied to. Normally it seems logical that if both payments and the refund were for the same amount, then the refund would undo the second payment, but is there an actual rule that would determine this? For example, suppose the 2nd charge was slightly more than the 1st, and the refund was for the 1st amount. Does this undo the first payment meaning the deduction must be taken in 2016?

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You deduct them in the year you paid them.

The amounts don't matter, and the logic of what gets paid back doesn't matter either.

Example: you pay $50 in the old year, and $60 in the new year. Then they reimburse you 50$.

  • In the old year you paid 50 $, so you deduct 50 $.
  • In the new year you paid 60 $ - 50 $ = 10 $ so you deduct 10 $.

The relationships between payments is irrelevant for deduction.

  • This makes perfect sense. But I feel like there must be exceptions. Example: you have an expensive medical procedure done, and the hospital refuses to do it without payment. Say you pay $10K on the spot at the end of the year. Insurance comes through and reimburses you in January. You do your taxes in April. Are you saying you legally can't call that a wash? You would have to deduct it in 2015 and record the reimbursement as income in 2016? – TTT Jun 15 '16 at 16:35
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    Probably. I am not sure how this case would be treated, but my guess is exactly what you proposed. Note that that would be actually to your advantage, as you move taxes into the following year; you basically get a free loan from the government. Of course you can construct extreme situations with significantly different income in both years that end up bad for you, but normally it would be a good thing to happen. – Aganju Jun 15 '16 at 16:37
  • OK then. Have a +1 for sticking to your guns. :) – TTT Jun 15 '16 at 16:38
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    If you are reimbursed in a later year for medical expenses you deducted in an earlier year, you generally must 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. For more information about the recovery of an amount that you claimed as an itemized deduction in an earlier year, see Recoveries in Pub. 525, Taxable and Nontaxable Income. – Bishop Jun 15 '16 at 16:43
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    Here's the link to Bishop's comment: irs.gov/publications/p502/… – TTT Jun 15 '16 at 18:08
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There are two accounting methods (that I know off) - cash and accrual. With the cash method, which is what most people use, the expenses is recorded when the bill is paid, with the accrual method, when the expense is incurred which in your case is the day of the service.

Since you incurred the expense and you paid it in 2015, you should deducted it from your 2015 tax year. The second bill was an error and was refunded so for all intends and purposes it's void.

I'm also fairly certain that tax regulations stipulate that in order to deduct medical expenses, the expense has to occur in the same tax year. That's certainly the case when using medical FSA.

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