Get your taxes done using TurboTax

1. The 2020 Form W-2 should include the $5,000 pay back and therefore be $5,000 lower than it would have been, and therefore, the tax should have been reduced, as well. And yes, if that did not occur, Form W-2 for 2020 should be corrected.  

2. For 2021, if the 2020 Form W-2 was not accurate because the tax was not reduced, then, file Section 1341 Claim of Right as either a deduction or a credit, whichever applies best to your circumstances.

If you will claim the standard deduction in 2021, then use the credit approach.

• To enter a deduction in TurboTax Online when itemizing deductions: 
  • From the left menu, select Federal.
  • At Deductions and Credits, scroll down to Other Deductions and Credits and click Show more.
  • Other Deductible Expenses click Start
• To enter a credit, use TurboTax CD/Download.
  • Go to Forms Mode. Scroll down to 1040/1040SR Wks to Line 11. This is where the amount of tax from Schedule 3, Line 12d under Other will be entered. See the screenshot from 2020 for reference.

See page 100 for 2020 Schedule 3, Line 12d instructions, for reference before 2021 Form 1040 instructions are published next year.

You may also want to verify compliance for the 401(k) limits which is $19,500 annually for both 2020 and 2021 if your contribution amount will be affected. See: IRS: Retirement Topics - 401(k) and Profit-Sharing Plan Contribution Limits