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Treat recoveries, information-return mismatches, and children's unearned income
The last income questions are about items that come back or carry over: money recovered after a deduction, documents that must match the return, losses carried across years, and a child’s investment income taxed at a parent’s rate. This lesson covers each one.
A recovery — a refund or reimbursement of an amount deducted earlier — is governed by the prior benefit. A state or local income-tax refund is generally included in income when the tax was deducted in an earlier year; the refund worksheet starts from the Form 1099-G amount but never above the prior Schedule A deduction, and a list of exceptions can shrink or erase the inclusion. Federal income-tax refunds are never included, because federal tax is never deductible.
The benefit is measured against the standard deduction the taxpayer could actually have taken. A married taxpayer filing separately whose spouse itemized had a standard deduction of zero, so every itemized dollar gave a full benefit and a later state refund is included up to the tax deducted, even when the itemized total was below the ordinary standard deduction.
The same benefit logic reaches beyond refunds. Medical expenses deducted one year and reimbursed the next may return to income in whole or in part. The 1099-G itself arrives by January 31 with a copy to the IRS, so the return must match the document or explain the difference through the worksheet. A taxable refund is figured through the State and Local Income Tax Refund Worksheet and entered on Schedule 1, line 1. Where the taxpayer could choose between deducting state and local income taxes or general sales taxes, the maximum refund includible is limited to the excess of the tax chosen over the tax not chosen.
Recoveries of non-itemized items follow the same benefit principle as refunds: a recovery is includible to the extent the earlier payment produced a tax benefit. Track what was deducted, what was recovered, and what tax benefit the deduction produced; the inclusion never exceeds the benefit.
Dee deducted $6,000 of state income tax for 2024 and receives a $1,200 state refund in 2025 documented on Form 1099-G. She generally includes the $1,200, figured through the refund worksheet. Had she taken the standard deduction in 2024 with no tax benefit from the payment, the worksheet would show no inclusion. Her $900 federal refund stays out entirely.
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If you received a state or local income tax refund (or credit or offset) in 2025, you must generally include it in income if you deducted the tax in an earlier year.View on the source
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Refunds of federal income taxes aren’t included in your income because they’re never allowed as a deduction from income.View on the source
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The payer should send Form 1099-G to you by January 31, 2026. The IRS will also receive a copy of the Form 1099-G.View on the source
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Enter the income tax refund from Form(s) 1099-G (or similar statement). But don’t enter more than the amount of your state and local income taxes shown on your 2024 Schedule A, line 5dView on the source
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Taxable part of your refund. Enter the smaller of line 3 or line 8 here and on Schedule 1, line 1View on the source
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If you could choose to deduct for a tax year either: • State and local income taxes, or • State and local general sales taxes, then the maximum refund that you may have to include in income is limited to the excess of the tax you chose to deduct for that year over the tax you didn’t choose to deduct for that year.View on the source
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If your plan reimbursed you for medical expenses you deducted in an earlier year, you may have to include some, or all, of the reimbursement in your income.View on the source
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Persons not eligible for the standard deduction. Your standard deduction is zero and you should itemize any deductions you have if: • Your filing status is married filing separately, and your spouse itemizes deductions on their return;View on the source
In 2024 a taxpayer paid $3,000 in medical expenses but could deduct only $900 because of the limit on medical-expense deductions. In 2025 the insurer reimburses $1,800 of those expenses. How much of the reimbursement is included in 2025 income?
Each information return is reported where its instructions say to report it. Nonemployee compensation and miscellaneous income arrive on Forms 1099-NEC and 1099-MISC, and the recipient instructions printed on the form say where each amount is reported — self-employment income stays on Schedule C while nonbusiness amounts such as hobby income follow their own instructions. Payment-card and third-party-network amounts arrive on Form 1099-K, whose payee instructions and IRS guidance settle what is being reported; for 2025 issuers must send it only when business transactions total more than $20,000 and number more than 200.
| Form | Typical contents | First reference |
|---|---|---|
| 1099-MISC | Miscellaneous income | Recipient instructions on the form |
| 1099-NEC | Nonemployee compensation | Recipient instructions on the form |
| 1099-K | Card and third-party-network amounts | Payee instructions and IRS guidance |
When a Form 1099-INT is wrong — wrong amount or other incorrect information — the fix runs through the issuer: ask for a corrected form. The IRS holds its own copy, so the return either matches the corrected document or carries the paper that explains the departure. Where interest is received as a nominee, the nominee must pass a Form 1099-INT to the actual owner showing the interest received on that owner's behalf; a recipient who holds a Form 1099-INT as nominee for another person reports the full amount and then backs out the nominee distribution.
An app sends Hal a $30,000 Form 1099-K for 260 business transactions plus a $400 Form 1099-MISC for a one-off hobby prize. Hal reports the $30,000 per the payee instructions, follows the MISC recipient instructions for the $400 as nonbusiness income rather than Schedule C, and asks the payer to correct any form that misstates the amount since the IRS holds its own copy. Had the $400 been nonemployee compensation for a design job, it would instead arrive on Form 1099-NEC; a hobby prize does not belong on Form 1099-NEC. Matching the IRS copies keeps the return consistent with IRS records.
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see the Instructions for Recipient included on Form 1099-MISC, or 1099-NEC, to find out where to report that income.View on the source
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For more information about what is being reported on Form 1099-K, see the Instructions for Payee included on that form and visit IRS.gov/1099K.View on the source
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will be required to send you a Form 1099-K only if the amount of your business transactions during the year is more than $20,000 and the total number of your transactions is more than 200.View on the source
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If you receive a Form 1099-INT that shows an incorrect amount (or other incorrect information), you should ask the issuer for a corrected form.View on the source
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Nominees. Generally, if someone receives interest as a nominee, that person must give you a Form 1099-INT showing the interest received on your behalf.View on the source
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Nominee distributions. If you received a Form 1099-INT that includes an amount you received as a nominee for the actual owner, report the full amount shown as interest on the Form 1099-INT on Schedule B (Form 1040), Part I, line 1.View on the source
A taxpayer and a sibling share a joint savings account. The bank sends the taxpayer a Form 1099-INT showing $1,500 of interest for the year, of which $450 belongs to the sibling. What should the taxpayer do?
A net operating loss (NOL) arises when the year’s deductions exceed its income. An NOL is used by deducting it from income in another year or years under the carry rules, entered as a deduction for an NOL from an earlier year. Compute the loss first — remove what the NOL computation disallows — then carry it where the rules point. Individuals, estates, and trusts use Form 172 to figure the NOL available for carrying back or forward.
NOLs arising in tax years after 2020 generally go forward only, to a later year. Certain farming losses are the exception and may be carried back 2 years. A carryforward is listed as a negative figure on Schedule 1 (Form 1040) for the year to which the NOL is carried, with Form 172 attached. NOLs carried forward to a year after 2020 face the 80%-of-taxable-income limit.
Iris’s sole proprietorship loses $25,000 in 2025 against $10,000 of other income, producing an NOL. She figures the loss on Form 172 and carries it forward to a later year, entering it as a negative-figure NOL deduction on Schedule 1 there, subject to the 80% limit — she does not carry it back because only the farming-loss portion of a post-2020 NOL can go back. Separately, a $1,000 reimbursement arrives for supplies she fully deducted last year: the full $1,000 returns to income because the earlier deduction bought its full benefit.
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If your deductions for the year are more than your income for the year, you may have a net operating loss (NOL). An NOL year is the year in which an NOL occurs.View on the source
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You can use an NOL by deducting it from your income in another year or years.View on the source
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Net operating loss (NOL) deduction. Enter any deduction for an NOL from an earlier year.View on the source
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Individuals, estates, and trusts use Form 172 to figure the amount of the NOL that is available for carrying back or forward.View on the source
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NOL carryback eliminated. Generally, you can only carry NOLs arising in tax years after 2020 to a later year. An exception applies to certain farming losses, which may be carried back 2 years. See section 172(b) and Pub. 225, Farmer’s Tax Guide.View on the source
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If you carry forward your NOL to a tax year after the NOL year, list your NOL deduction as a negative figure on Schedule 1 (Form 1040) for the year to which the NOL is carried.View on the source
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NOL deduction limitation. In general, your NOL deduction for tax years beginning after December 31, 2020, cannot exceed the sum of: (1) the NOLs carried to the year from tax years beginning before January 1, 2018; plus, (2) the lesser of: (a) the NOLs carried to the year from tax years beginning after December 31, 2017, or (b) 80% of the excess (if any) of taxable incomeView on the source
A sole proprietor has a net operating loss for 2025 from a retail business. How is the NOL used?
The kiddie tax answers one question about a child’s investment income: whose rate applies. Form 8615 must generally be used to figure the tax on unearned income over $2,700, and it is required when all five conditions hold: more than $2,700 of unearned income such as taxable interest, ordinary dividends, or capital gains including capital gain distributions; the child is required to file a return; the child meets the age-and-support test (under 18, or 18 without enough earned income for support, or a full-time student at least 19 but under 24 without enough earned income for support); at least one parent was alive at year-end; and the child does not file a joint return. When those conditions hold, Form 8615 is completed and attached to the child’s return; when unearned income stays at or under $2,700, the child’s income is taxed at the child’s own rate with no Form 8615.
A second path exists for small cases: a parent can elect on Form 8814 to include the child’s income on the parent’s return. The election is available only when every condition holds: the child was under 19 (or under 24 if a student) at year-end; the child’s gross income was only interest and dividends including capital gain distributions and Alaska Permanent Fund dividends; that income was less than $13,500; the child would otherwise be required to file; the child files no joint return; no estimated payment and no prior-year overpayment was applied under the child’s name and SSN; no backup withholding applied; and the electing parent is the parent whose return must be used. The election trades the child’s filing for the parent’s return, so use it only when every condition is met.
Ten-year-old Jay has $4,000 of dividends and no earned income, supported entirely by his parents, with at least one parent alive at year-end and no joint return. He meets all five Form 8615 conditions: $4,000 is more than $2,700, he must file, he was under 18, a parent was alive, and he files no joint return — so part of the $4,000 is taxed at the parent’s rate with Form 8615 on Jay’s return. Had his dividends been $1,000 instead, the $2,700 test would fail and the income would stay at Jay’s own rate. If instead $2,000 of dividends were Jay’s only income, entirely interest and dividends under $13,500, with no joint return, no estimated or overpayment under Jay’s SSN, no backup withholding, and the proper electing parent, his parents could elect to carry the $2,000 onto their own return with Form 8814 and file nothing for Jay.
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Form 8615. Form 8615 must generally be used to figure the tax on your unearned income over $2,700 if you are under age 18, and in certain situations if you are older.View on the source
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You must file Form 8615 if you meet all of the following conditions. 1. You had more than $2,700 of unearned income (such as taxable interest, ordinary dividends, or capital gains (including capital gain distributions)). 2. You are required to file a tax return.View on the source
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3. You were either: a. Under age 18 at the end of 2025, b. Age 18 at the end of 2025 and didn’t have earned income that was more than half of your support, or c. A full-time student at least age 19 but under age 24 at the end of 2025 and didn’t have earned income that was more than half of your support.View on the source
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4. At least one of your parents was alive at the end of 2025. 5. You don’t file a joint return in 2025.View on the source
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c. Was a full-time student at least age 19 and under age 24 at the end of 2025 and didn’t have earned income that was more than half of the child's support. 4. At least one of the child's parents was alive at the end of 2025. 5. The child doesn’t file a joint return for 2025.View on the source
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• Your child was under age 19 (or under age 24 if a student) at the end of 2025.View on the source
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Your child had gross income only from interest and dividends (including capital gain distributions and Alaska Permanent Fund dividends).View on the source
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The interest and dividend income was less than $13,500.View on the source
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Your child is required to file a return for 2025 unless you make this election.View on the source
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Your child doesn’t file a joint return for 2025.View on the source
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No estimated tax payment was made for 2025 and no 2024 overpayment was applied to 2025 under your child’s name and SSN.View on the source
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No federal income tax was withheld from your child’s income under the backup withholding rules.View on the source
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You are the parent whose return must be used when making the election to report your child’s unearned income.View on the source
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Exception for certain children under age 19 or full-time students. If certain conditions apply, you can elect to include on your return the income of a child who was under age 19 at the end of 2025 or was a full-time student underView on the source
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Single dependents—Were you either age 65 or older or blind? No. You must file a return if any of the following apply. 1. Your unearned income was more than $1,350.View on the source
A 16-year-old child has $3,500 of unearned interest income, is required to file a return, files no joint return, and has a living parent. No parental election is made. How is the interest taxed?
The course asks you questions like these as you learn, brings back the ones you miss, and ends with full-length practice exams.
See the course Or take the free 12-question checkGroundSkill is independently produced and is not affiliated with or endorsed by the IRS. Sources last checked 2026-09-14. Exam preparation, not tax advice.