The claim of right allows you to take taxable income as a deduction that you received in a prior year if it turns out that you had to repay that amount. Note that the long term disability payments had to be included as income last year to be eligible for a claim of right. LTD usually is, but it depends on whether you or the employer were paying the premiums.
If you want to claim it as an itemized deduction this year:
- Select Federal, then Deductions and Credits
- Scroll down to Other Deductions and Credits (you may need to select See All Tax Breaks and/or Show More)
- Scroll down to Other Deductible Expenses and select Start (or Revisit)
- Answer the questions until you get to the Did you have any of these other expenses? screen.
- Select Yes
- On the Tell us about your other expenses screen, enter the amount of the repayment in the Claim of right repayment over $3,000 box and select Continue
The amount that you are entering in step 6 is your amount of taxable LTD income that you received in 2020 and had to repay to the insurance company in 2021.
The second method is to recalculate your 2020 taxes as if you never received that income to begin with. To do this, you would reduce your taxable income in 2020 by the amount you repaid in 2021 and then calculate your taxes in 2020. You can take a credit this year for the difference between the taxes that you paid and the taxes you would have had to pay had you never got the payment in the first place in 2020. You will need access to 2020 to recalculate the difference. To claim the credit in 2021, you will need TurboTax Desktop for 2021:
- Return to the current tax year (The credit can only be applied using the Forms mode in the TurboTax CD/Download product)
- Select the Forms icon
- Choose 1040/1040SR Wks from the list on the left and the worksheet will appear.
- Scroll down to the Other Credits and Payments Smart Worksheet (you can find this in a box near the end of the worksheet)
- Enter the credit amount you calculated on Line E, Claim of Right, IRC 1341 credit for repayments of prior year income
You can choose either method depending on which helps you the most. If you are itemizing anyways, there might not be a drastic difference and method #1 is certainly easier.
Whichever method you choose, you will also need to make an adjustment on your Indiana state tax return if you were taxed on the disability income in 2020. To do this you will want to look for Repayment of Previously Taxed Income Deduction in the Miscellaneous section under the heading Here's the income that Indiana handles differently. Enter the repayment amount, assuming it was taxed by Indiana in 2020. This should be the same amount you entered in step 6 using the first method for your federal taxes.
