A recovery happens when you get a refund, reimbursement or rebate of an amount you deducted or took a credit for in a previous tax year.
If this happens, you typically need to include the recovery amount as income for the current year up to the amount that the deduction or credit reduced your tax in the previous year.
For example, let’s say you paid $3,000 in medical expenses in 2016 and itemized $500 of those expenses on last year’s tax return. This year, you received a $750 reimbursement from your insurance company for 2016 expenses.
You only have to report $500 of that reimbursement as income because it’s the amount you actually deducted.