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t53summers
Returning Member

In 2008, I recvd severance of $160k. My employer went bankrupt and the court sued me for $160k. In 2019 I repaid $16k. Can I deduct the $16k on Schedule A line 21.

IMO, this is "contra-income" or an income reversal.
16 Replies
Carl
Level 15

In 2008, I recvd severance of $160k. My employer went bankrupt and the court sued me for $160k. In 2019 I repaid $16k. Can I deduct the $16k on Schedule A line 21.

I'm not clear here.

In 2008, I recvd severance of $160k. That would be from your former employer.

My employer went bankrupt. (In what year?) Big deal. You already had your money.

the court sued me for $160k.  Was "the court" your former employer?

In 2019 I repaid $16k. This is where I'm lost. If your former employer has been non-existent for years, how can you "pay back" anything to them if they're no longer in business? As it stands now, I do not see this as a repayment of anything. Most likely it's because you've not provided enough facts and information to work with here. You can't "pay back" wages to an employer that went out of business. Can you see my conundrum here?

 

t53summers
Returning Member

In 2008, I recvd severance of $160k. My employer went bankrupt and the court sued me for $160k. In 2019 I repaid $16k. Can I deduct the $16k on Schedule A line 21.

Yes.  I could not include all relevant info in 170 characters.  Here is a summary without text limitation. 

 

In 2008, I was laid off from my employer and was paid a severance of $160,000 which I accounted for as income on my 2008 taxes.    Nine months later, my ex-employer went bankrupt.  The bankruptcy receiver sued me to repay my entire severance (which is legal under bankruptcy laws).  I settled this lawsuit in 2019 and repaid $16,000.  My belief is the $16,000 repayment is not a legal expense but “contra-income” or a reversal of income and should be deductible on Schedule A line 21.  IRS Publication says income recoveries should be added on line 21 so why shouldn’t income reversals be deducted? Just because my situation is not dealt with in the publication does not mean it is not legal and justified.   

limitation. 

t53summers
Returning Member

In 2008, I recvd severance of $160k. My employer went bankrupt and the court sued me for $160k. In 2019 I repaid $16k. Can I deduct the $16k on Schedule A line 21.

btw, thanks for answering. 

Critter
Level 15

In 2008, I recvd severance of $160k. My employer went bankrupt and the court sued me for $160k. In 2019 I repaid $16k. Can I deduct the $16k on Schedule A line 21.

See pub 525 pages 34-35 ...

 

 

If you had to repay an amount that you included in your income in an earlier year, you may be
able to deduct the amount repaid from your income for the year in which you repaid it. Or, if
the amount you repaid is more than $3,000, you may be able to take a credit against your tax for
the year in which you repaid it. 

 

Repayment over $3,000.

 

If the amount you repaid was more than $3,000, you can deduct
the repayment as an other itemized deduction on Schedule A (Form 1040), line 16, if you included the income under a claim of right. This means that at the time you included the income,
it appeared that you had an unrestricted right to it. However, you can choose to take a credit for
the year of repayment. Figure your tax under both methods and compare the results. Use the
method (deduction or credit) that results in less tax.

 

https://www.irs.gov/pub/irs-pdf/p525.pdf

 

 

Critter
Level 15

In 2008, I recvd severance of $160k. My employer went bankrupt and the court sued me for $160k. In 2019 I repaid $16k. Can I deduct the $16k on Schedule A line 21.

The Turbotax program does not support method 2 :

 

Method 1. Figure your tax for the year of
repayment claiming a deduction for the repaid
amount.


Method 2. Figure your tax for the year of
repayment claiming a credit for the repaid
amount. Follow these steps.
1. Figure your tax for the year of repayment
without deducting the repaid amount.
2. Refigure your tax from the earlier year
without including in income the amount
you repaid in the year of repayment.
3. Subtract the tax in (2) from the tax shown
on your return for the earlier year. This is
the credit.
4. Subtract the answer in (3) from the tax for
the year of repayment figured without the
deduction (step 1).
If method 1 results in less tax, deduct the
amount repaid. If method 2 results in less tax,
claim the credit figured in (3) above on Form
1040. (If the year of repayment is 2019, and
you're taking the credit, enter the credit on
Schedule 3 (Form 1040), line 13, and see the
instructions there.)

Rick19744
Level 11

In 2008, I recvd severance of $160k. My employer went bankrupt and the court sued me for $160k. In 2019 I repaid $16k. Can I deduct the $16k on Schedule A line 21.

This issue is more complicated than what it appears (nothing in tax is simple):

  • While you do get a benefit, it is not as simple as just claiming a deduction for the $16,000
  • What you have here is a "Claim of Right" issue under Section 1341 of the Code
  • There are several calculations that need to be run here in determining the benefit that you are entitled to
  • As a result, I recommend that you consult with a tax professional and have them prepare your return.  
  • Make sure you bring all documentation to the tax professional; including your 2008 tax return.

 

EDIT

While it doesn't change my response, not sure why I was not able to see @Critter's response when mine was posted 45 minutes later.  Frustration of the new platform.

*A reminder that posts in a forum such as this do not constitute tax advice.*
Hal_Al
Level 15

In 2008, I recvd severance of $160k. My employer went bankrupt and the court sued me for $160k. In 2019 I repaid $16k. Can I deduct the $16k on Schedule A line 21.

The term for what you have is repayment.

Simple answer: Yes, you may take a Schedule A deduction.  It goes on line 16 of the 2019  Schedule A (still in draft mode).  Even in the "old days" it went on line 28, not line 21.

 

But, see the other replies for details and advice.  Most people come out better claiming the credit, not the deduction.

t53summers
Returning Member

In 2008, I recvd severance of $160k. My employer went bankrupt and the court sued me for $160k. In 2019 I repaid $16k. Can I deduct the $16k on Schedule A line 21.

Thanks so much for your reply.  In my post I meant to say line 21 Schedule 1, not Schedule A. 

t53summers
Returning Member

In 2008, I recvd severance of $160k. My employer went bankrupt and the court sued me for $160k. In 2019 I repaid $16k. Can I deduct the $16k on Schedule A line 21.

Thanks.

t53summers
Returning Member

In 2008, I recvd severance of $160k. My employer went bankrupt and the court sued me for $160k. In 2019 I repaid $16k. Can I deduct the $16k on Schedule A line 21.

Lets say in 2008 I paid $40,000 in federal taxes on my severance of $160,000 (25% marginal rate).  In 2019 I paid back $16,000.  Are you suggesting I might be able to deduct $40,000, not $16,000, on my 2019 taxes?  To be honest that seems the fair way but who said the IRS is fair!

Hal_Al
Level 15

In 2008, I recvd severance of $160k. My employer went bankrupt and the court sued me for $160k. In 2019 I repaid $16k. Can I deduct the $16k on Schedule A line 21.

Q.  Are you suggesting I might be able to deduct $40,000, not $16,000, on my 2019 taxes?  

A. No.  Yes (with the emphasis on MIGHT) if you had paid back the full $160K.  But, you only paid back $16K.  So, you might be able to get back the tax you paid on $16K , back in 2008.  But it is not a deduction. It's much better, it's a tax credit; an actual reduction  (apparently about $4000 [25% of 16K]) )of your 2019 tax liability. 

 

Q.   In my post I meant to say I take a deduction on line 21 Schedule 1, not Schedule A. 

A.  No. You do not get to take an "above the line" deduction on Schedule 1, or anywhere else directly on form 1040.  If you elect the deduction, instead of the credit, it goes on Schedule A (itemized deductions). 

t53summers
Returning Member

In 2008, I recvd severance of $160k. My employer went bankrupt and the court sued me for $160k. In 2019 I repaid $16k. Can I deduct the $16k on Schedule A line 21.

Just to be sure, I am not looking for tax advice, but thoughtful ideas and thank you for yours.  In 2008, the marginal tax rate on $16k income for joint returns is 10% or $1,600.  Would TurboTax be able to handle this situation correctly or would I have to manually insert it and on what schedule and what line would this $1,600 credit go on my 2019 return? 

Hal_Al
Level 15

In 2008, I recvd severance of $160k. My employer went bankrupt and the court sued me for $160k. In 2019 I repaid $16k. Can I deduct the $16k on Schedule A line 21.

 "I am not looking for tax advice, but thoughtful ideas". 

Your  original questions sounded like asking for tax  advice. Tax advice is what we do here and you need tax advice.

 

  " In 2008, the marginal tax rate on $16k income for joint returns is 10% or $1,600". 

No. The $16,000 is on top of the other  $144,000 of the severance and any other income you had. The marginal rate is  25% and maybe some at 28%,.

 

Q. Would TurboTax be able to handle this situation correctly or would I have to manually insert it?"

A. You have to manually insert the credit.  TT does not do the credit calculation or compare it to the alternate deduction. 

Q.  on what schedule and what line would this credit go on my 2019 return? 

A. In 2018, it went on line 74 of schedule 5.  The forms will be changing for 2019.

 

 I, too,  recommend that you consult with a tax professional and have them prepare your return. 

t53summers
Returning Member

In 2008, I recvd severance of $160k. My employer went bankrupt and the court sued me for $160k. In 2019 I repaid $16k. Can I deduct the $16k on Schedule A line 21.

Thanks.  I included that just to state I wont take action on anyone who posts incorrect "advice".  I used to work on Wall Street and we had hedge clauses up the wazoo in all outside communication to insure we wouldn't get sued.

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