claim withheld tax back from CA

[GreenApple123]

I joined a company in Dec 2024 and received a signing bonus that same month (Dec 2024). I resigned from the company in April 2025 and returned the unvested bonus (9-months worth) back to the company (bonus was vested monthly for 12 months). My federal and CA tax were withheld for the entire 12-months worth of the bonus. I should be able to get the credit back for the 9-months worth of withheld federal and CA taxes (since I returned the 9-months worth of unvested bonus). I figured out how to claim the credit back from the IRS, but I have trouble finding the correct line to enter the credit (of IRC 1341 "Claim of Right") for either Form 540 or Form 540 CA . Can anyone help?  Thanks.

[GreenApple123]

I guess the question is specifically where on the correct CA Forms (540? or 540 CA?) to enter/write the IRC 1341 claim of right credits.

Any help will be appreciated

[MaryK4]

Add the calculated credit amount to Line 78 (the "Total Payments" line).  You must write "IRC 1341" and the specific credit amount directly to the left of the total on that same line.

On Schedule CA (540), Part I, Section B, Line 16 (Column B), enter the amount of the federal deduction you took for the repayment. This essentially "adds back" the federal deduction so you can properly take the dollar-for-dollar credit on Form 540 instead. 

NOTE: You will not be able to do this with TurboTax online (you may print the return for mail filing and write in the IRC 1341 notation).  If you are using the TurboTax Desktop you can make the entries in Forms mode, but you will have to print and mail the returns.  

[GreenApple123]

Thanks so much for your reply.

Just want to make sure that I understood your answer correctly by using some numbers. Let's say, my federal credit was $5000 and my CA credit was $1000.

I took the federal credit of $5000 and entered on Federal Schedule 3 Part II Line 13b.

On CA 540, Part II, Line 16 (Column B), I enter $5000 (the federal credit I took); and on Form 540 Line 78 (Total Payments), I will write "IRC 1341 $1000" and manually (by overwriting??) deduct $1000 from my total payment amount?

Also, you mentioned enter the federal deduction on Schedule CA (540) Part I, Section B, Lline 16 (Column B), I  assume you mean Part II Line 16 (Column B)?

I am still quite confused! Please help!! Thanks so much!

[MaryK4]

No, you enter your federal credit amount ($5,000) for Schedule CA (540), Part II, Line 16, Column B.  Because you took a federal credit, the IRS considers that a "deduction" you've already received for tax purposes. To prevent double-counting this benefit on your California return, you must "subtract" that federal benefit from your CA itemized deductions because TurboTax will transfer the amount from the federal return.

For the Form 540, Line 78 (Total Payments), you need to ADD your calculated $1,000 CA credit to the other payments (like your W-2 withholding) already on that line.  In most cases, this would be added as an Estimated Tax Payment, but in this specific case, that would cause a circular problem: TurboTax would add the estimated tax payment (like the credit above) then you would have to re- subtract- this is the best way to get around the TurboTax calculation (and once again, this is an extremely rare case where this would happen).

Please let me know if you need more clarification!  @GreenApple123 
 

[GreenApple123]

Thanks for your huge help!

Still have confusion about Line 78. I understand I need to write "IRC 1341 $1000 on the dotted line), but how do I physically add the $1000 to the total payment? Creating an entry on the estimated payment? or manual overwrite? Or there is another way that I totally missed??

Thanks again for your help!!

[MaryK4]

You will have to do a manual OVERWRITE (which is why you will not be able to efile) to add the $1000 to the amount already there.  @GreenApple123 

[GreenApple123]

Thanks again for walking through with me the various steps to resolve the issues, I will summarize below the steps to complete both the federal and CA state returns. Could you please help me see if everything is correct?

Since I resigned in April 2025 from a company I joined in Dec 2024 (and received a signing bonus in Dec 2024), I paid back my unvested bonus back to them. I want to claim back my $5,000 federal withheld and $1,000 CA state withheld for those unvested months. Here’s what I plan to do:

Federal Return:
Schedule 3, Part II, Other Payments and Refundable Credits: I entered $5,000 on L13b (Section 1341 credit for repayment of amounts included in income from earlier years).

CA State Return:
I entered $5,000 (federal credit amount) on Schedule CA (540), Part II, Line 16, Column B.
For the Form 540, Line 78 (Total Payments), I will write “IRC 1341 $1,000” on the dotted line to the left of Line 78.
I will OVERWRITE the original amount with $1,000 addition (eg, $2,645 will now become $3,645).

I will only efile the federal return. Once it’s accepted by the IRS, I will print the CA state return for mail filing and write in the IRC 1341 notation.

[DaveF1006]

Your federal return looks good, but there are some adjustments to make on your Ca return. 

California does not allow a "tax credit" in the same way the IRS does for Section 1341. Instead, California requires you to take a deduction from your income.

The Correction for Schedule CA (540)

1. Your plan to enter $5,000 on Schedule CA (540), Part II, Line 16, Column B is correct.
2. This effectively subtracts the $5,000 from your California taxable income.
3. Note: You use the amount of the repayment (the actual dollars paid back), not the "federal credit amount." If you paid back exactly enough to result in a $5,000 federal credit, ensure the number in Column B represents the gross repayment amount.

The Correction for Form 540, Line 78

This is where your plan needs an adjustment.. Do not overwrite the total on Line 78. California handles the "Claim of Right" differently than the Federal government.

1. In California, if you are following the "Claim of Right" rules:
2. Do not add the $1,000 to your withholding/payments line.
3. Instead, you calculate your tax based on the lower income (after the Schedule CA deduction).
4. If you still believe you are owed a specific credit amount based on CA's version of the IRC 1341 credit, it is typically handled by recomputing the tax for the year the income was included and taking the difference as a reduction in current  year tax.

[!IMPORTANT] California Specifics: Unlike the IRS, the CA FTB often prefers you to simply take the deduction on Schedule CA. Adding manual text like "IRC 1341" to the dotted line is a common practice for federal returns, but on a CA Form 540, it can trigger a manual review and delay your refund if it doesn't match their automated system.

[GreenApple123]

Thanks so much for your reply.

You mentioned "California does not allow a 'tax credit' in the same way the IRS does for Section 1341. Instead, California requires you to take a deduction from your income".

I checked the California Schedule CA Line 16 instruction page 33-34 - Other Itemized Deductions, under Claim of right, it says,

If you deducted the repayment on your federal tax return and are taking a credit for California, enter the

amount of the federal deduction on line 16, column B. To help you determine whether to take a credit or deduction, see the Repayment section of federal Pub. 525, Taxable and Nontaxable Income. Remember to use the California tax rate in your computations. If you choose to take the credit instead of the deduction for California, add the credit amount online 78, the total payment line, of Form 540. To the left of the total, write “IRC 1341” and the amount of the credit.

It does seem to support taking the credit (in additional to use the deduction method)?

Would you clarify? I am really confused.

Thanks

[DianeW777]

You seem to understand the California (CA) rules based on the instructions you added to your post. You can take the credit  if you calculate a better advantage.  Watch the screens as you go through the CA return to be sure you take the appropriate amount. You definitely are not allowed to take both on either the federal or the CA return. The following seems quite clear.

• To help you determine whether to take a credit or deduction, see the Repayment section of federal Pub. 525, Taxable and Nontaxable Income. Remember to use the California tax rate in your computations

As indicated by our tax expert you basically determine the correct tax on CA to see if a credit is reasonable and more advantageous:

1. (#4 above) If you still believe you are owed a specific credit amount based on CA's version of the IRC 1341 credit, it is typically handled by recomputing the tax for the year the income was included and taking the difference as a reduction in current  year tax.

The key is they may review to determine if your calculations are accurate.