@JMB72 thank you for your question. So assuming the funds are paid back in 2023 due to the settlement of the lawsuit this is a Claim of Right, which 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 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
- You should test both methods and use the one that results in the lower overall tax
See this article for further detail on how to handle it: What is a claim of right repayment?
All the best,
Marc T.
TurboTax Live Select Time Tax Expert
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