Tuition Reimbursement

[Dawgs_3102]

I had to payback to my old company the Tuition Reimbursement. It was a significant amount and almost 30% higher than the reimbursement due to taxes and etc.  The w2C i received only corrected federal in boxes 3,4,5,6.  It did not correct wages. Do i need to ask my company to correct the wages and state taxes too? It is over 40% of my actual wages. Or do I back into the wages manually?  I do not qualify for the tax deduction for grad school.  

[rjs]

Rather than trying to cover the procedures for several possible scenarios, please give us some more details.

In what year did you receive the reimbursement and report it as income on your tax return?

In what year did you pay it back?

How much was the reimbursement? Was it all included in the wages in box 1 of your W-2 in the year that you received it? How much did you pay back? Please give exact amounts. One dollar could make a big difference in how you handle it.

Why did you have to pay it back?

I don't understand what you mean by the repayment being "almost 30% higher than the reimbursement due to taxes and etc." Was the repayment higher than the amount reported as income on your W-2, or do you mean that it was higher than the net amount you received, after taxes? Exact numbers might help here, too.

[Dawgs_3102]

The net amount of the tuition was $40k. It was counted as wages in 2022 and filed in 2022. 

The repayment ended up being $53k, paid back in 2023. 

The w2c provided back the company was not changed.  Wouldn't wages have been reduced by $53k?

Thanks

[rjs]

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@Dawgs_3102 wrote:

The net amount of the tuition was $40k.

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The amount of your tuition doesn't matter. What matters is the gross amount that was included the wages on your 2022 W-2. You have not clarified that. I don't understand why you paid back $53,000 if you only received $40,000 gross.

You do not adjust the wages on your W-2 or amend your 2022 tax return. You can get a deduction or credit for the repayment on your 2023 tax return, but not for more than you originally reported as income on your 2022 tax return. If you reported the reimbursement as $40,000 of income in 2022, that's the maximum amount you can use to calculate the deduction or credit.

Since the amount you repaid was more than $3,000, you have a choice of two ways to handle it on your 2023 tax return. The first, and simplest way is to claim an itemized deduction for the amount of income that your reported in 2022 and repaid in 2023. The $40,000 repayment will be more than enough to allow you to use itemized deductions instead of the standard deduction, even if you don't have much in the way of other itemized deductions. If you simply enter the repayment in TurboTax, it will use the itemized deduction method.

The second, more complicated option is to claim a "Credit for repayment of amounts included in income from earlier years," which would directly reduce your 2023 tax.

When you prepare your 2023 tax return you should try both options and use the one that makes your tax lower. You can read all the details of both options under "Repayments" in IRS Publication 525. The discussion in Publication 525 calls the itemized deduction "method 1" and the credit "method 2."

TurboTax will not calculate the credit for you, or compare the deduction and credit to see which is better. You have to do all the calculations yourself.

To calculate the credit (method 2) you have to recalculate your 2022 tax return. That's easy to do if you used the CD/Download TurboTax software for 2022, but you can't do it in TurboTax Online. If you used TurboTax Online for 2022 you would have to download your .tax2022 data file, then use the CD/Download TurboTax software for 2022 to do the recalculation. You could either call customer service and ask for a free download of the 2022 software, or use the free 2022 amend software, even though you are not actually amending your 2022 tax return. You don't file the recalculated 2022 return.

If the credit works out better, there is one more complication. For 2022 and earlier there is no way to enter the credit in TurboTax Online, because it's not covered in the TurboTax interview. I expect that this will still be true for 2023. The credit can only be entered in forms mode, which is only available in the CD/Download TurboTax software. So you would have to use the CD/Download software for 2023 as well.

Since the TurboTax software for 2023 is not available yet, I can't give you exact step-by-step instructions for either method. Check back here for detailed instructions in 2024, when you are preparing your 2023 tax return.

This is an unusually large repayment. You should expect the IRS to take a long hard look at your 2023 tax return, which will delay the processing of the return, and delay any refund you might be getting. You might want to try to adjust your withholding for the rest of 2023 so that you will owe a small amount instead of getting a refund. But to do that you have to take into consideration the deduction or credit for the repayment, so it's complicated.

[rjs]

Note the following in the Repayments section of Publication 525.

"Repaid wages subject to social security and Medicare taxes. If you had to repay an amount that you included in your wages or compensation in an earlier year on which social security, Medicare, or tier 1 RRTA taxes were paid, ask your employer to refund the excess amount to you. If the employer refuses to refund the taxes, ask for a statement indicating the amount of the overcollection to support your claim. File a claim for refund using Form 843."

Also, I said earlier that you do not amend your 2022 tax return because of the repayment. However, there is one situation where you might have to amend it for another reason. That is if you had more than one employer in 2022, and you had a credit for excess Social Security tax on Schedule 3 line 11 of your 2022 tax return. The reduction of the Social Security tax in box 4 on your W-2c will reduce or eliminate the excess Social Security tax. If the difference is more than a few dollars, you have to amend your 2022 tax return to correct the excess Social Security tax. But you still don't change the reported wages. Again, this applies only if you had more than one employer in 2022.

[NCperson]

@Dawgs_3102 as outlined earlier in this thread, there are two paths to take to get back the tax on the $40k.  However, the way to determine that path is really easy.  (My comments assume you are in the same tax bracket for both years and you are filing Single in both years).

1) if you are going to Itemize  your deductions in 2023, without this situation, then the path is simple.  Add $40k to Schedule A and your tax is reduced by $40k times your tax bracket.  Easy and Simple. 

2) If you are otherwise going to take the Standard deduction in 2023, then the more conplicated path is the way to go.  Why?  Because if you were to simply add $40k to Schedule A (and to demonstrate the point, assume there are no other expenses that could be itemized), then your tax is only reduced by $40k less the standard deduction of $13,850 or about $26k times your tax bracket.  You were going to get the first $13,850 anyway, so the marginal increase in the deduction is only $26k - not $40k as in 1).  In this case, the way to get all the tax back is to go down the more complicated path.   

make sense?