It sounds like you have a "repayment" situation.
Repayments. 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% of AGI rule) or you can take a credit. The credit is computed by re-figuring the tax from the previous year 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 have to do that manually. 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.
You can only deduct amounts that were included as taxable income on previous tax returns.
* If the amount is $3,000 or less, no deduction or credit is allowed. In the past, a miscellaneous itemized deduction, subject to the 2% of AGI threshold, was allowed. But, all miscellaneous itemized deduction, subject to the 2% of AGI rule went away in 2018.
