This situation is described in IRS Publication 525. If the amount is more than $3000, you can take a itemized deduction, on line 16 of schedule A (not subject to the old 2% rule) or you can take a credit. The credit is computed by re-figuring the tax from the previous year(s) as if the income had not been received. Then the difference in tax is claimed as a credit on the current year's return. TT does not do the credit calculation or compare it to the alternate deduction. You enter the credit in the forms mode (the forms mode is not available in the on-line versions of TurboTax[TT]). All entries that seem like you should be able to enter on Form 1040 or Schedules 1 through 3 have to be entered on TurboTax's 1040 Worksheet. Scroll way down to Other Credits and Payments Smart Worksheet. Select item D, claim of right under IRC 1341 for repayments. It ends up on line 13 of schedule 3.
So, the taxpayer has the option of either claiming the credit or deducting the repayment as an other itemized deduction, whichever provides the greater benefit. But, you cannot file an amended prior year return.
If the amount is $3,000 or less, no deduction or credit is allowed.
