In December 2017, Todd, a cash basis taxpayer, paid $1,200 of fire insurance premiums for the calendar year 2018 on a building he held for rental income. Todd deducted the $1,200 of insurance premiums on his 2017 tax return. He had $150,000 of taxable income that year. On June 30, 2018, he sold the building and, as a result, received a $500 refund on his fire insurance premiums. As a result of the above:

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According to the tax benefit rule, if a taxpayer has already taken a deduction for an expense in a previous tax year, any refunds or reimbursements received for that expense must be included in gross income in the year in which they are received. Therefore, Todd should include the $500 refund in his 2018 gross income. Todd should not amend his 2017 return as he properly took a deduction for the full amount of the insurance premiums paid in 2017. Additionally, since the refund relates to insurance premiums for the building, it should not be added to the sales proceeds from the building. The claim of right doctrine is not applicable to this situation as it applies to income that a taxpayer mistakenly believes to be theirs, which is not the case here.

In December 2017, Todd, a Cash Basis Taxpayer, Paid $1,200