@parisrosaries wrote:
Thank you so much for your response!
Since I filed my taxes last year, I was taxed on the gross amount that I am repaying this year. For example, if the gross wages for that period is $15,000. I was then taxed accordingly.
This year, they paid me the correct payment for that period, which already had withholdings. Now, I am paying back the $15,000 (so including the withholdings). Maybe I'm going about the wrong logic, but it seems like while I will get credit back for the tax that I paid last year on this gross amount, I am "out" the withholdings that I will be paying back to my employer this year. Is that the wrong way to think about it?
I already tried to explain this. Let's take your figure of $15,000.
For 2019, you were overpaid $15,000 in wages, which was probably subject to $1,150 of social security and medicare tax, $2,250 of federal income tax, and $1000 of state income tax. So your net wages in 2019 were $10,600 extra as a result of the overpayment. In 2020, you repay $15,000, meaning you now paid $4,400 of taxes for wages you "never received" (have since paid back). You recover those taxes using a federal claim of right credit, a state claim of right credit, and form 843. You end up zeroing out the excess wage payment; you originally received 15,000 in wages and paid $4,400 in taxes, and you repaid $15,000 in wages and received $4,400 in tax credits or refunds.
Now, suppose that your federal withholding from 2019 was not $2,250, but $3,000. That would have meant that you got a tax refund of $750 in 2019 resulting from those wages and withholding. So even though the withholding was $3000, you're only "out" the tax amount of $2,250, because the rest was already refunded to you, and the tax amount is the amount of credit you will claim on your 2020 return, making you whole.
