@rgm4 wrote:
Great answer! To expand the question, here is another situation. Employee receives a signing bonus of say 75K. Leaves within the same year and the employer requires it all to be paid back within the same year. Employer did not fix the W-2 so the 75K is included on the W-2 but only the net was actually received by the employee (net of taxes fed state local, 401K, etc). Is this 75K payback with in the same year of receiving still reported as an itemized deduction subject to the 2% limit if itemizing (IRC1341 deduction but its the same year) or as a credit as stated above when its within the same tax year?
Not exactly.
If the repayment amount is more than $3000, you can take it either as a direct tax credit (that you must calculate yourself, and enter manually in Forms mode that is only offered in Turbotax Desktop versions); or you can take it as a special itemized deduction not subject to the 2% rule. The deduction is easier to claim, but you are allowed to choose whichever method (deduction or credit) gives you the larger reduction in tax.
You claim the actual amount you paid back as cash, regardless of other adjustments. If you paid back the full 75K, you will get the state and federal income tax adjustment on your tax return by taking the credit or deduction, that makes you whole as to the income taxes. For social security taxes, you need to file a claim using form 843. (This is separate from your tax return, not filed with your tax return, and can't be prepared with Turbotax.). For the 401k, you got to keep that (it wasn't removed from the 401k.
