Since she received the funds in 2024, she should report that as income in that year. In 2025, she can process a claim of right to get a credit or deduction relating to the income reported in 2024 if the amount in question is over $3,000.
To report a claim of right repayment credit in TurboTax follow these instructions:
- Using the desktop version of TurboTax, bring up the "Forms" mode by clicking on that icon on the menu bar
- Choose the 1040/1040SR Wks in the list of forms
- Scroll down the 1040/1040SR Wks until you see Schedule 3, Part II - Other Payments and Refundable Credits
- Enter the amount of the credit on line 12 (D) Claim of Right, IRC 1341 credit for repayments of prior year income
If you haven't filed your 2024 tax return yet, make a note of the change in tax when you enter the income from the bonds, the difference will be the credit amount you enter when you do the claim of right entry.
If you already filed your 2024 return, you may need to amend it to determine the change in tax. You will see on option for this on your home page in TurboTax, under Your tax returns and documents at the bottom of the page. You will not file the amended return, you just need to remove the income that was paid back to determine the tax you paid on it. It will be the difference in tax due or refunded when you remove the income you paid back.
You can download your online TurboTax program to your computer so you don't have to re-enter all of your information. You will see an option for that on your left menu bar while working on your program in TurboTax. Look for the Tax Tools menu option, then Tools, then see the option on the right to Save your (year) return to your computer.
Income repayment of less than $3,000 can only be deducted as a miscellaneous itemized deduction, which is not allowed for tax years beginning after 2017 through 2025. If the amount is over $3,000, it is entered on line 16 of Schedule A (Itemized Deductions) as an Other Deduction if you want the deduction in lieu of the credit.
[Edited 3/14/25 at 5:08 AM PST]
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