Because you have the choice of taking a tax deduction or a direct credit, you can kind of game the system, because you can do whichever gives you the biggest benefit. You can either deduct the wages repaid on schedule A, or you can take a direct credit equal to the amount of tax that you paid in past years that was due to the higher wages that are now repaid (you have to compute this manually). If you are now in a higher bracket, then potentially the deduction will save you more now, than the excess tax you paid before. That's perfectly fine.
