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No, you do not have to file an amended return for the 2020 year nor should you ask them for a corrected W-2 for 2021. You could use a "claim of right" Section 1341 credit since the repayment was more than $3,000. This is a federal tax credit for taxpayers who reported income in the previous year, but have to repay the income because it was paid in error. The Section 1341 credit is found on your 1040, Schedule 3.
For the method on how to calculate your amounts for Schedule 3, please see Publication 525 and go to page 36. Please keep in mind that these Section 1341 credits do tend to get audited, so it is important to keep all of your documentation in order in case the calculations get questioned.
To enter on your tax return, please follow the instructions below:
- Open your return.
- Click on Federal.
- Click on Deductions and Credits.
- Scroll down to Other Deductions and Credits and Click Start next to Other Deductible Expenses.
- Answer Yes to the question Did you have any of these other expenses?
- Enter the amount in Claim of repayment over $3,000.
I have attached screenshots below for additional guidance.
What is a claim of right repayment?
