About your 2nd question: The $7900 is not deducted on 2022 or 2021. Instead, you will use that amount to create the IRC 1341 for this year's return by recalculating the tax on your 2021 return as if you had not earned that income. See Turbo Tax article What is a Claim of Right Repayment.
About your 3rd question:
1. No, you want to claim the credit which is a dollar for dollar reduction of your tax liability. You are not reducing wage income.
2. Yes, you will enter the corrected w2 exactly as it is. As for updating records, your employer has already handled that when the form was created. The w2C is a confirmation of the adjustments made for SS and Medicare.
It sounds like you got the money one year and paid it back the next. If for some reason the money paid back was held longer, please see my answer here for help.
Edit: Opus 17 is right, my timeline is off. The whole point of the IRC 1341 is to claim credit for taxes paid on income in a prior year. Which is why the income has to be claimed before you can have a credit - a very few people do take the deduction instead. [4/7/2023|8:11 AM]
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