Deductions & credits

@nickl1

1. Yes, repayment in 2020 means tax return for 2020

2. You are a cash basis taxpayer, no accrual for you.

3. No, you can claim it as a credit since it is over $3,000

4. The final amount of wages repaid on your letter should include those credits.

5. You want to use the credit, not the deduction.

6. Here are the two methods for figuring your deduction or credit. While you are doing your 2019 taxes, go ahead and determine you tax liability minus the money so when you do your taxes next year, you know the amount of credit allowed.

Method 1.    Claiming a deduction for the repaid amount. You deduct it as a miscellaneous itemized deduction on Schedule A  

This is the flow in TurboTax: 

Federal taxes > Deductions & credits > I'll choose what I work on > Other deductions and credits > Other deductible expense>Go thru to third screen> answer YES to "Did you have any other deductions that are not subject to the 2% limitation?"

Enter the amount you repaid under, "Claim of Right Repayment (Only if over $3,000).

Method 2.    Figure your tax claiming a credit for the repaid amount. Follow these steps.

1.      Figure your tax without deducting the repaid amount for 2019.

2.      Refigure your tax for 2019 without including the income that you had to repay. 

3.      Subtract the tax calculated  in (2) from the tax shown on your return for the earlier year. This is the credit.

IRC 1341 is the Internal Revenue Code allowing this. For an example, see another answer of mine at Example of Repaid Funds.  Here is the IRS pub 525 link really far down, repayments over $3,000.