Relocation lumpsum payback to previous employer (minus the tax gross up the company paid to IRS)

[bhmaroon]

Hello, 

I received a relocation lumpsum of $17,000 and the tax gross up on my W-2 was $24,166.68 in year 2020. Tax part (Federal + FICA + Medicare) was $7166.68. In year 2021, I left the company and since I hadn't satisfied a 2-year agreement, I was supposed to payback the full relocation including tax gross up.

But the company asked me to only pay back the actual lumpsum of $17,000 and mentioned that tax portion will be recouped directly from Government. 

I did receive a corrected W-2 for year 2020 but this only changed the boxes for Medicare wages and Medicare taxes (Reduced the total Medicare wages by $24,166.68 and corresponding tax reduction by $350.4) with explanations on why other boxes won't change (Box 1 and 2 will not be changed since correction is not in the same year of tax filing and IRS does not allow this, Box 3 and 4 wont change since my social security wages does not fall below the IRS cap, so technically no change in my social security taxes).

Since Company will work with IRS to reverse the portion of my relocation taxes, should I file the W2C for year 2020 at all? If I do file, I'm not sure how I can let IRS know to not pay me the excess tax refund but instead pay the company. It would have been simpler for company to have just asked me for a full gross repayment and easier for me then to file a claim of right, but for the above case, I'm not sure the best way to handle. 

Can you please share some insights on how should I go about handling the situation?

Thank you

[ErnieS0 · Accepted solution]

It depends. Unless you are very high income, a change in the amount of social security or Medicare tax paid will not change your 2020 taxes.

In come cases it will. For example, if you changed jobs and your total social security and Medicare paid was over the limit and you got credit for the excess on your taxes. Some states, such as Massachusetts, allow a deduction for FICA tax.

Enter the corrected W-2 in your 2020 return. If there is any change. If not, don't file.

How do I amend my 2020 return?

Repayment

You can claim the $17,000 repayment as a tax credit or deduction on your 2021 return. If your going to claim a credit, you can use your 2020 return to figure the amount.

See Repayments.

To claim a credit, figure out what your tax would have been without the bonus and claim the difference as a credit on your 2021 tax. For example, if your 2020 tax liability was $10,000 with the bonus and $9,000 without it, then you would enter a $1,000 tax credit on your 2021 return.

If you used TurboTax last year, you can “amend” your return and subtract $17,000 off your W-2 to figure your tax liability without the bonus.

Then enter the tax difference in TurboTax. You will need the CD/Download version. Champ @Hal_Al explains how in How do I claim a Claim of Right CREDIT (not as a deductible expense) on TurboTax? I see the option i...

To claim the deduction, enter the amount in Other Deductions and Credits > Other Deductible Expense > Did you have any of these less common expenses?

[bhmaroon]

Hi @ErnieS0 ,

Thank you for a detailed response. I calculated the tax correction after the payback based on the method that you suggested and to see if I can claim any credit. While there is a tax excess paid here, since the Company will recoup back the excess part and rest of the reductions being linear, I don't see really see a net change in my taxes after my payback + company claiming their tax portion from IRS. So, I will probably not file an amendment here. I'm from State of Texas, there is no State tax filing - so one less step. 

The only non-linear part here is the social security wage cap of $137,700 and corresponding tax of $8537 for year 2020. Even after repayment, net taxable wage does not go below this mark and if company claims a recoup on the part of social security tax they paid, then that will result in a deficit on my side to the IRS (IRS will then see an adjusted social security tax of ($8537 - X), where X is the company recoup). I'm not sure how to let IRS know when and whether such a deficit will happen. But in any case, any changes/event to my tax filing should generate a notice from IRS/company and hopefully there will be an instruction to move forward. 

Thank you

[DianeW777]

Yes, the IRS will send a letter if there is something due in relationship to the social security or medicare taxes.  If I understand your social security wages still remain at the maximum for social security tax so there will be nothing due on that.  The medicare taxes could come into issue, but maybe not depending on what the company does. 

You can respond if and when you get a letter from the IRS but for your tax return there is really nothing to do.

[aidenpearce]

I have a similar situation. I got 11,000 from my employer in 2021 and repaid back 16,000 in March 2022. Can I claim credit in my 2021 return now or should I file it the way it is and wait until next year to claim credit?

[AmyC]

You repaid the money in 2022, so it goes on your 2022 return, probably as an IRC 1341 credit. 

While you are in the 2021, go ahead and deduct the 16,000 from income to see the difference in the tax liability and note that difference somewhere safe so you can use it on next year's return as a credit unless you choose the other method and itemize deductions.

Recap: Do not deduct it in 2021 but do know the taxable difference.

Reference:  What is a Claim of Right Repayment. 

@aidenpearce