For tax years beginning after 2017, you can no longer claim any miscellaneous itemized deductions, so if the amount repaid was $3,000 or less, you aren’t able to deduct it from your income in the year you repaid it.
If the amount you repaid was more than $3,000, you can deduct the repayment as an other itemized deduction on Schedule A (Form 1040), line 16, if you included the income under a claim of right. This means that at the time you included the income, it appeared that you had an unrestricted right to it. However, you can choose to take a credit for the year of repayment. Figure your tax under both methods and compare the results. Use the method (deduction or credit) that results in less tax.
For the details of entering your repayment (if over $3,000) your issue has been explained by Community user Critter, and I have copied the solution here with updated form references:
Repayment over $3,000. If the amount you repaid was more than $3,000, you can recover the tax you originally paid using one of two methods. You can do it as a deduction on schedule A or a tax credit on line 13 of the 1040 form if when you included the income in a previous year, it appeared that you had an unrestricted right to it.
Figure your tax under both methods and compare the results. Use the method (deduction or credit) that results in less tax.
Method 1. Claiming a deduction for the repaid amount. You deduct it as a miscellaneous itemized deduction on Schedule A line 16.
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.
- Figure your tax without deducting the repaid amount.
- Refigure your tax from the earlier year without including the income that you had to repaid.
- Subtract the tax calculated in (2) from the tax shown on your return for the earlier year. This is the credit.
This is the flow in TurboTax (This can only be done in the Forms mode of the Desktop version of TurboTax)
Go to FORMS (top right of main screen) > Form 1040 > Scroll below line 12 to "Other Payments and Credits Smart worksheet" Please enter the credit on line D. This credit should show up on Form 1040 line 13d
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If we follow the guidlines for computing the tax credit for prior years in lieu of itemizing, do we still need to file amended returns to validate the credit? And if yes, do I just adjust the reported income for the applicable W-2? Please let me know so I can make sure I do this the right way. Thank you in advance! Tracey