Updated October 18, 2026. Quick answer: Worksheet 2 in Publication 525 figures how much of a refund or reimbursement of an itemized deduction you claimed in an earlier year belongs in this year’s income. It compares your recovery with the part of your prior-year itemized deductions that beat the standard deduction. Line 11 is the amount to include, and it goes on Schedule 1.
What this worksheet is for
Publication 525 states the idea behind the worksheet this way: “A recovery is included in income only to the extent of the deduction amount that reduced your tax in the prior year (year of the deduction).” The publication also says when the shorter route applies: “You generally don’t need to use this worksheet if you file Form 1040 or 1040-SR and the recovery is for state or local income taxes paid for the immediately preceding tax year.”
The publication lists cases where the shorter route is not available. It says you “must use this discussion if you’re a nonresident alien (discussed later) or any of the following statements are true.” Among them: “You received a refund in 2025 that is for a tax year other than 2024.” And: “You owed AMT in 2024.” If your only recovery is an ordinary state income tax refund, the page on Schedule 1 line 1 state and local income tax refunds covers where that refund goes.
One year per worksheet: “If you recovered amounts from more than 1 year, such as a state income tax refund from 2024 and a casualty loss reimbursement from 2023, complete a separate worksheet for each year.” The same paragraph says “Use information from your tax return for the year the expense was deducted.” For state refund statements, see Form 1099-G boxes 2 and 3.
The worksheet line by line
Lines 1a and 1b come from a companion computation. The worksheet says “NOTE: Before completing lines 1a and 1b, see Worksheet 2a, Computations for Worksheet 2, Lines 1a and 1b.” Worksheet 2a is not reproduced here; read it in your own copy of the publication.
| Line | What the worksheet says |
|---|---|
| 1a | “State/local income tax refund or credit” |
| 1b | “State/local real estate and personal property taxes” |
| 2 | “Enter the total of all other Schedule A (Form 1040) refunds or reimbursements (excluding the amounts you entered on lines 1a and 1b)” |
| 3 | “Add lines 1a, 1b, and 2” |
| 4 | “Itemized deductions for the prior year.” “Schedule A (Form 1040), line 17” |
| 5 | “Enter any amount previously refunded to you” “(don’t enter an amount from line 1a, 1b, or 2)” |
| 6 | “Subtract line 5 from line 4” |
| 7 | “Standard deduction for the prior year.” |
| 8 | “Subtract line 7 from line 6. If the result is zero or less, stop here. The amounts on lines 1a, 1b, and 2 aren’t taxable” |
| 9 | “Enter the smaller of line 3 or line 8” |
| 10 | “Taxable income for prior year” “(2024 Form 1040, line 15; or 2024 Form 1040-NR, line 15)” |
| 11 | “Amount to include in income for 2025:” “If line 10 is zero or more, enter the amount from line 9.” “If line 10 is a negative amount, add lines 9 and 10 and enter the result (but not less than zero)” |
| A | “Divide the amount on line 1a by the amount on line 3. Enter the percentage” |
| B | “Multiply the amount on line 11 by the percentage on line A. Enter the result here and on Schedule 1 (Form 1040), line 1” |
| C | “Subtract the amount on line B from the amount on line 11. Enter the result here and on Schedule 1 (Form 1040), line 8z” |
The prior-year itemized deductions on line 4 are the total from the Schedule A total itemized deductions of the year the expense was deducted. For the standard deduction on line 7, the worksheet footnote says “See the instructions for prior year forms at IRS.gov for prior year standard deduction.”
A worked example
Illustration, not an IRS example. Every input is invented, including the prior-year standard deduction on line 7. The numbers are chosen so that line 11 is less than line 3 and the A, B, C allocation is needed.
| Item | Illustration |
|---|---|
| Line 1a (state income tax refund, invented) | $300 |
| Line 1b (real estate and personal property tax refunds, invented) | $0 |
| Line 2 (other Schedule A refunds, invented) | $300 |
| Line 3, add lines 1a, 1b, and 2 | $600 (computed) |
| Line 4 (prior-year itemized deductions, invented) | $30,000 |
| Line 5 (amount previously refunded, invented) | $0 |
| Line 6, line 4 minus line 5 | $30,000 (computed) |
| Line 7 (prior-year standard deduction, invented; the real figure is in the prior-year instructions) | $29,500 |
| Line 8, line 6 minus line 7 | $500 (computed) |
| Line 9, smaller of line 3 or line 8 | $500 (computed) |
| Line 10 (prior-year taxable income, invented) | $40,000 |
| Line 11, line 10 is not negative so enter line 9 | $500 (computed) |
| Line A, line 1a divided by line 3 | 50% (computed) |
| Line B, line 11 x line A, goes to Schedule 1 line 1 | $250 (computed) |
| Line C, line 11 minus line B, goes to Schedule 1 line 8z | $250 (computed) |
In this illustration line 8 is smaller than line 3, so only part of the recoveries is included. The worksheet then splits that part between Schedule 1 line 1 (line B) and Schedule 1 line 8z (line C).
Where the number comes from
Lines 1a, 1b and 2 are your actual refunds or reimbursements. The footnotes limit them: “Don’t enter more than the amount deducted for the prior year.” And for line 1a and 1b: “Don’t enter more than the excess of your state and local income tax deduction over your state and local general sales taxes you could have deducted.” Line 10 comes from the earlier return: “(2024 Form 1040, line 15; or 2024 Form” 1040-NR, line 15). Its footnote says “If taxable income is a negative amount, enter that amount in brackets.” “Don’t enter zero unless your taxable income is exactly zero.” The footnote on line 11 gives the publication’s own arithmetic: “For example, $700 + ($400) = $300.” Itemized deductions and the choice against the standard deduction are the subject of standard deduction 2025.
Where it goes next
After line 11, the worksheet branches. “If line 11 equals line 3:” “Enter the amount from line 1a on Schedule 1 (Form 1040), line 1”, or “Enter the amounts from lines 1b and 2 on Schedule 1 (Form 1040), line 8z.” “If there is an amount on line 1a, enter the amount from line 11 on Schedule 1 (Form 1040), line 1” covers the case where line 11 is less than line 3 and only one of the amounts is present. When line 1a and another line both have amounts, the worksheet says “If line 11 is less than line 3, and there are amounts on line 1a and on line 1b or 2, complete the following worksheet.” That is lines A, B and C above.
Schedule 1 feeds Form 1040: its total is entered on the line captioned “Additional income from Schedule 1, line 10”. See also Schedule 1 (Form 1040) and Form 1040 line by line.
Edition and line numbers
This page reads the 2025 edition of Publication 525, the edition for the tax year 2025 return filed in 2026. The Worksheet 2 (Recoveries of Itemized Deductions) in it refers to the 2024 Form 1040 and Schedule A for the prior year. Check the tax year printed on the worksheet in your own copy and use that year’s line numbers, because a different year’s worksheet can number or word its lines differently.
Common mistakes
- Entering a refund larger than the deduction you took. The footnote is explicit: “Don’t enter more than the amount deducted for the prior year.”
- Treating a negative taxable income as zero on line 10. The footnote says “Don’t enter zero unless your taxable income is exactly zero.”
- Combining several years in one worksheet. The worksheet says “complete a separate worksheet for each year.”
Related: Schedule 1 line 1 state and local income tax refunds, Form 1099-G, Schedule A total itemized deductions, standard deduction 2025, and Schedule 1 (Form 1040).
Sources
- Publication 525, Taxable and Nontaxable Income (2025 returns): https://www.irs.gov/pub/irs-pdf/p525.pdf
- Form 1040 (2025): https://www.irs.gov/pub/irs-pdf/f1040.pdf
Read from the IRS documents linked above on October 18, 2026. General information, not tax advice. Your own facts decide the outcome, and a preparer, the account provider or the IRS is the right place to confirm anything consequential.