If you had to repay an amount that you included in your income in an earlier year, because at the time you thought you had an unrestricted right to it, you may be able to reduce your income by the amount repaid in the current tax year if the amount you repaid is more than $3,000, or you may take a credit against your tax for the year repaid, whichever results in the least tax.
"Least tax" in this case means overall - the lowest tax impact you achieve by either reducing your income by the amount repaid or taking a credit against your tax for the year repaid.
You would do this yourself, using the steps previously provided to determine which way results in the lowest tax impact.
If you reported the full amount of income you received on your 2021 return, and the amount you had to repay in 2022 was less than $3,000, you can generally report the amount repaid as a negative number in the same income area as the income was reported.
See this TurboTax article on Claim of Right repayments.
A Claim of Right Repayment is a deduction you can take in the current tax year if you’re required to pay back income in excess of $3,000 from a previous tax year that you thought you could keep. You reported and paid taxes on the money, not knowing you’d have to pay it back.
While you still have to repay the money, there are a couple of ways you can get a tax break by reporting the repayment on your current year's tax return:
- Take a simple deduction of the repaid income from the current year’s income (this is the easiest option for taxpayers who itemize their deductions)
- Use TurboTax CD/Download to calculate the amount of tax you overpaid and take a refundable credit
- This may be the more valuable option, though it requires a bit more work. More details appear in the article.
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